Buying and owning a home of your own is almost every young adult’s dream from the moment you start hitting the workforce. However, times have become increasingly hard especially in obtaining a decent valued property. After scouting for the best property to buy and knowing which documents is needed, you will have to understand the best home loan options that will work best for you. For a first time property owner, this can be a daunting task to figure out the best property loan for you. There are a myriad of choices available in the market, thus making the best choice may help you to save more in the long term.
When deciding on the most beneficial loan, you need to count in factors such as the loan figure you can borrow, the total interest you will be paying, the amount to pay every month and others. In addition, you need to be prudent and carefully consider what you can afford as anything could happen like losing your job, getting a pay cut etc. After all, a home loan is a long term commitment.
There are generally two common types of loans in the market: conventional loans and Islamic loans. Conventional loans are most commonly offered by banks, who charge interest in return for providing the loan. Islamic loans are structured based on Islamic principles for Muslim borrowers.
Here is an overview of the both types of property loans that are available to help Malaysia finance the purchase of their home or investment properties.
Conventional Loans
Term Loan
The most basic and common conventional home loan is the term loan. You will be paying the principal and interest rates together monthly while having a maximum tenure of 35 years. As time goes by, the fixed monthly repayment will increase, simultaneously reducing the interest rate.
This method enables you to pay off your loan in 35 years. A word of caution though, if you manage to settle your loan in an earlier time frame of 2 to 5 years, you will have to bear a penalty of approximately 3%.
Overdraft Loan
This is a pretty unique loan in the market and also one of the tougher ones to acquire. You can withdraw money from an account linked to your housing loan during your loan repayment period. This is decided with a predetermined interest rate with repayment terms and conditions agreed with the bank.
You generally have to only pay the interest rate of the loan, with the amount deducted from your linked account. The upside of this loan is there is no fixed loan tenure and your principal will be lowered if you have paid more than the interest rate. However, the downside is that the interest rates are higher than the standard rates.
Flexi Loan
A combination of Term and Overdraft loan, the fully flexi loan provides great flexibility to the borrower. It is beneficial for those who may have excess cash flow. The mechanism behind this loan is a current account linked to your loan account whereby you have the option to withdraw or make extra repayments at any time without informing the bank in advance. You can enjoy the advantage of lower interest rates when you credit more money into your current account.
As an example, if a customer has taken a full Flexi property loan of RM 400k with a bank and the customer has RM 250k in cash parked inside the linked current account, interest calculations will only be based on the deducted amount, hence saving the borrower RM 250k in interest. In addition, you can have a shorter loan period if you would like to conclude your loan repayment earlier without the hassle of any penalty fees unlike the term loan.
However, there are some cons associated with fully flexi loans. In general, most banks charge a monthly maintenance fee ranging from RM 5 to RM 10 for the current account. Also, some banks offer a better interest rate for a term loan compared to flexi loans.
Islamic Loans
Islamic loans are based on Shariah law of Malaysia. They may have the same features as conventional loans but they adhere to different principles and concepts. The main difference is there is no interest charged on the former while the latter incurs an interest. There are a few popular types in the market as explained below:
Al Bai’ Bithaman Ajil
One of the earliest Islamic home loans to emerge, the loan utilizes a buy-and-sell concept. Basically, the bank buys the property for you at the current market price and then sells it back to you at an agreed price. There will be an additional charge in the total price paid to the bank for their profit gain. The repayment will be done in monthly instalments.
Musharakah Mutanaqisah
This type of loan focuses on a partnership between you and the bank. You buy a property with the bank together, and become a tenant to the bank. The bank leases out the property to you until you eventually finish paying all the instalments. The aim is to buy out the bank’s share of the property until it becomes yours.
Murabahah
A popular Islamic home loan, it is also known as the commodity housing loan. It is generally more popular for short term financing. Banks are enabled to propose fixed, variable or tiered rates in this loan. The bank in this regard will incorporate the cost plus profit in the final price of the commodity to you which is sold to you, the borrower. It is the sale of a commodity for cash or deferred price. Then, the commodity is used to pay for the property desired.
Choosing The Right Home Loan For You
As you can see, different types of home loans come with different trade-offs, so with a better understanding about how each of them work, you’ll be able you to decide on the best option that is most suitable for your property purchase.
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