You’ve seen the home of your dreams and you’ve decided that it’s THE ONE. You pay the booking fees and now you’re all excited about your new home. You even start imagining the wall colours and the perfect décor for your soon-to-be abode. And then comes the white elephant in the room, not a REAL white elephant standing in a room of course, but the next browbeating task of getting a home loan.

Choosing the right home loan may seem like a daunting process, but it shouldn’t be so if you’re able to narrow down your preferences and understand the features better.

Home Loan: What Is It?

A home loan is an amount of money borrowed by a purchaser from a financial institution, namely a bank, at a certain rate of interest to be paid with the monthly instalment payment for the purpose to finance the purchase of property. The property will then be charged or assigned as a security to the bank for the loan until the full loan sum is paid.

Bear in mind that not all home loans are equal. Although same features may be shared, each type has different benefits. Since buying a home is a huge investment, choosing the right type of loan to suit your own unique financial needs is important.

What Are The Types Available?

In this article, we will discuss the 7 different types of home loans available in Malaysia. They are Term Loan, Fixed Rate Loan, Flexi Loan, Islamic Loan, Overdraft, Refinancing and Government Housing Loan.

1. Term Loan

   Term Loan is one of the most common loans in Malaysia. This loan has a fixed repayment schedule with a usually maximum tenure of 35 years depending on your age at the time of taking the loan. The instalment and interest rates are bound together in the monthly payment. When making the repayment or monthly instalment part of the repayment goes to the principal loan and partly goes to repay the interest. As you continue paying your instalments the initial years payment will go towards payment of the interest and as years go by the interest charges are reduced and your repayment goes towards the settlement of the principal loan sum. This enables the borrower to finish paying off their loan in 35 years.

   The interest charges are separated into base lending rate/base rate and spread rate. The spread rate remains constant and same throughout the loan tenure but the base lending rate may fluctuate depending on the bank and market. But rest assured the base lending rate/base rate is under close scrutiny and control by the Bank Negara.

   So if the base lending rate/base rate drops, you may have the opportunity to complete your repayment less than the prescribed tenure.

2. Fixed Rate Loan

   Fixed Rate Loan, as its name suggests, has a fixed interest rate throughout its tenure and is also another common type of loan in Malaysia. This would be a perfect choice for those who worry on how increasing interest rates and wavering Base Lending Rates may affect their loan repayments in the future.

   Most fixed rate loan is taken for short term rather than long term. So if you have plan to take up a loan for 5-10 years as you are confident that you can repay the loan within a shorter time, fixed rate loan will be a good choice.

3. Flexi Loan

   With the Flexi Loan, the borrowers will enjoy the benefits of making early repayment or if the borrowers wish to make a partial repayment by depositing money into their Current Account. Borrower will be charged the interest on the loan amount remain outstanding.

   How this works is that, the borrowers may withdraw money from their account without having to give prior notice to the bank, and this will result in charge of interest on the amount withdrawn for that month. Whenever the borrower has extra cash and puts it into the account, the interest charges will cease and only the outstanding loan amount will be charged with interest. .

   If you are a businessman or expecting a fat bonus, this will be a good choice. When you have extra money, you can put into the account to stop the interest and when you need quick cash you can make a withdrawal and the interest will be charged when you withdraw until you repay.

   But such loan usually come with higher interest rate.

4. Islamic Loan

   Islamic Loans are Syariah Law compliant. Popular among many property buyers, especially short-term property investors, the nature of this loan is that the banks are unable to charge the borrowers a penalty for early settlement of the amount. However, those who opt for this loan are strongly encouraged to scrutinise the Letter of Offer from the bank for any special clauses before signing, as selected banks have different terms.

   Here are some of the more common Islamic Loan concepts.

   • Al-Bai’ Bithaman Ajil
     This feature follows the “buy and then followed by a sale” loan concept. The borrower will sell the property to the bank in cash, and the bank will in turn, sell the property back to the borrower. The borrower will then make the payment for the purchase via monthly instalments to the bank.

   • Al-Ijarah / Ijarah Muntahiyah Bittamlik
     This loan concept is where by the borrower “rents” their property from the bank. Ijarah translates to rent, while Ijarah Muntahiyah Bittamlik translates to “rent ending with ownership”. This concept allows the borrower to “rent” the property from the bank until they finish paying the total amount and once that is accomplished, the property becomes theirs.

   • Musharakah Mutanaqisah
     The buyer and the bank enter into an agreement to buy a property together, and the borrower becomes a tenant to the bank. The monthly loan repayment will cover the borrower’s loan and part of the bank’s share. The end of the loan will see the complete purchase of the bank’s share of the property.

   • Murabahah
     Also known as the commodity housing loan, banks are able to offer fixed rates, tiered rates and variable profit rates through this loan concept. First, the bank fixes the price of a commodity that has been agreed upon with the borrower, and then sells it to the borrower. Then, the borrower will use the commodity to pay for their property.

5. Overdraft

   A home loan overdraft will enable you to borrow money from an account linked to your housing loan. This falls into place only after the bank pre-determines the interest rate as well as repayment terms and conditions. When you utilise the overdraft you will be charged interest on the amount withdrawn.

6. Refinancing

   Refinancing your housing loan means settling a current existing loan and replacing it with a new one with different terms and conditions usually to take advantage of lower interest rate. It basically involves borrowing money from the same bank again (or in some cases, another bank) under a new loan and new T&Cs to settle the debt you owe in your current home loan account. This type of loan is popular among property investors and owners who find that the value of their property has appreciated or after paying for many years, decide to take refinance to get extra money for some other investment or just simply to make early repayment.

7. Government Housing Loan

   A Government Housing Loan is specially allocated for government servants under the Bahagian Pinjaman Perumahan.

   Below are the items that government servants are allowed to finance with their loans:

   • Purchase of land
   • Purchase of land with house
   • House renovation
   • Construction of house
   • Construction of road leading to house
   • Other debt settlement in order to purchase any of the above

   Those who opt for the government housing loan need to appoint their own lawyer and ensure timely disbursement of the loan.

Is There Anything That I should Be Aware Of?

One thing that a buyer should keep in mind is the “Lock-In Period” of the loan. It is the length of time within which you will incur a penalty from the bank if you choose to do a full settlement. For example, if the lock-in period in your home loan contract is 5 years but you have decided to pay the amount in full before the said 5 years, the bank can impose a penalty of 2% to 3% of the total loan amount. So, be sure to pay attention to the lock-in period to avoid incurring extra costs for an early settlement.

All said and done, it’s important that the buyer chooses the right type of loan that fits their financial capacity to ensure a smooth-sailing home loan application, disbursement and the eventual repayment.

Remember to check with your local banker to get more information and understanding how loan work.

The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.