The Must-Know Basics on Home Loans
Budgeting is a crucial part of your property purchase journey. You would need to determine how much monthly loan repayment you can afford and the ceiling price of a property. It is advised that your total monthly installments (car, house etc) should not exceed a third of your monthly income.
Common types of home loans
Most financial institutions offer either a fixed term loan or flexi loan. A traditional fixed term loan requires you to pay a fixed amount each month for the entire tenure of your home loan. A flexi-loan gives you the option of reducing your interest whenever you wish. If you have a strict and predictable cash-flow pattern, a traditional term loan may be best. If you prefer flexibility in paying off your loan as and when you can, then a flexi-loan is recommended. It usually takes about one to two weeks for your loan application to be approved from the time you submit all relevant documentation.
Conduct the necessary research and look for loan packages with the lowest interest rate. The interest that financial institutions charge will be determined by the Base Lending Rate (BLR) set by Bank Negara Malaysia (BNM). Some financial institutions use a separate system to calculate interest rates such as Mortgage Lending Rate (MLR). If you are applying for a Shariah compliant home loan, Base Finance Rate (BFR) is used to determine profit rates.
Example: The current BLR is 6.6%. If the home loan’s interest rate is BLR -2.20%, then the interest rate will be 4.40%. Margin of financing (how much you can borrow)
The amount of financing provided by a financial institution depends on the market value (for completed properties only) or purchase price of the property, whichever is lower. The margin of financing could go as high as 95% of the value of the house. It is assessed on factors such as:
Example: For a RM700,000 house, you’ll need to pay RM70,000 upfront if your margin of financing is 90%.
In July 2013, BNM has capped the length of mortgages at 35 years and personal loans at 10 years, in an effort to curb household debt levels.
You can purchase either a Mortgage Reducing Term Assurance (MRTA) or Mortgage Reducing Term Takaful (MRTT), which provides for full settlement of the outstanding balance of the housing loan with the financial institution, in the event of total permanent disability or death of the borrower. Premiums can usually be included in the loan amount, and the repayment period of the premium is usually spread over the loan tenure. The premium is only incurred once. Financial institutions have their own panel of insurers and most of them can arrange insurance on your behalf with the premium charged to your loan account.
Alternatively, you can also purchase a House Owner/Fire Insurance policy which provides coverage for your property against natural disasters such as flood, fire, riot, strike and malicious damage. For properties with strata titles such as apartments or condominiums, you do not need to buy the insurance because the condominium’s appointed management company would have taken up insurance on the entire building. However you should ensure that you obtain the sub-certificate of the Master Policy issued by the insurance company from the management company and share it with the financial institution. This is so that the financial institution is aware that the property has been insured and will not buy another fire insurance on your property. In such a case, you will be required to assign your rights under the policy to the financial institution.
The financial institution disburses (pays out) the loan once it has received advice from its lawyer that the legal process has been completed and the loan documents are in order. At this time you will be informed of the date and amount of the first installment you have to make.
Fees and charges
Lock-in period: Financial institutions normally charge a penalty of 2% to 3% (on your original loan amount) if you fully pay off your home loan within the first two to three years.
Stamp duty and legal fees: You need a lawyer to prepare your sales and purchase agreement (SPA) in addition to your loan agreement; and pay the necessary government stamp duties according to the stipulated regulations.
Delays and penalties: During the process of purchasing a property, you may be penalised if there are delays in the completion of the paperwork. Speak to your lawyers and be aware of any deadlines for payments and draw-downs.
Quit rent and assessment fees: The annual quit rent covers the tax for the land your property is built on, while the assessment fees is to be paid twice yearly to your local council.
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