Imagine you already had in mind a property that you’re convinced it would make a good home. Being a first time home buyer, you’re eager to move in and thus started to learn the necessary steps to apply for a housing loan. While working towards committing yourself to a large amount of loan, how can you be sure you have all the documents needed for the home loan? Are there other aspects of a housing loan application you’ve unintentionally overlooked? Here are some key aspects to consider when getting a home loan.
1. Fixed Interest Rate VS Variable Interest Rate
For many of us, we turn to housing loans because most of us are unable to afford entirely our first home. One of the fundamental tips for getting a home loan is to understand the concept of interest rates, types of rate and how they work.
Principal is the money that you initially agreed to pay back or in other words, the amount that you borrowed. Interest is the cost of borrowing the principal. When applying for a housing loan, you’ll want the lowest possible interest rate. That small difference in percentage can save you thousands of Ringgit in the long run, leading to a more affordable housing loan repayment.
Generally, two types of interest rate are offered in home loan packages.
(a) Fixed Interest Rate
Essentially, you’re paying an interest rate that doesn’t change throughout the period of your loan. If you’re concerned with unexpected changes in the rate, fixed rate loans may be more suitable. Additionally, monthly instalments remain the same under a fixed rate, which makes mortgage financial planning easier.
(b) Variable Interest Rate
The fluctuation of variable interest rate is based on Base Lending Rate (BLR), which is regulated by Bank Negara Malaysia (BNM). When the BLR falls, you’ll pay less interest but if the BLR rate rises, you’ll have to pay more. Variable interest loans usually offer lower rates compared to fixed interest loans.
Even though there is no right way of determining the best type of interest rate, there is one thing that places you one step ahead: browsing through different banks. It’s important to know the different rates offered for home loan packages among various financial institutions. That way, you’ll have a basis for comparison to choose which bank offers the best rate for your loan repayment.
2. Types of Housing Loans
The next thing to know when preparing a first-time home buyer application is the type of home loan that matches your financial circumstances. Banks in Malaysia commonly offer housing loan packages under these three categories: term, semi-flexi and flexi loan.
(a) Term Loan
A term loan is a loan from a bank that has a fixed repayment schedule. This type of loan requires you to pay the same amount per monthly instalment for the entire loan duration. It also includes an unfixed interest rate, which means there is an additional balance to be repaid. Additional payments are treated as pre-payments for future instalments. In most cases, this type of loan doesn’t allow potential home buyers to reduce loan interest with advance payments. However, you can discuss with your bank about this arrangement.
(b) Semi-Flexi Loan
For a semi-flexi loan, the principal can be lowered when extra amounts are paid in addition to your monthly instalments. Subsequently, this lowers the amount of interest. If you wish to withdraw the additional amount you’ve paid, a processing fee will be charged by the bank. Some banks may pose extra requirements before allowing you to make a withdrawal.
(c) Flexi Loan
Going for a flexi loan will link your housing loan account to a current account. The amount of monthly instalments is deducted every month from the current account by default. Unlike the term loan, the extra payments placed in the current account lower the principal as well as the interest charged. As the name implies, a flexi loan allows you to withdraw the extra payments whenever you like. The majority of banks will collect monthly fees between RM5 to RM10 for the maintenance of the current account. However, not all banks offer a flexi loan.
3. Knowing Your Margin of Finance (MOF)
Basically, the Margin of Finance (MOF) is the percentage of the property price that the bank lends to you as a loan. In Malaysia, the maximum MOF for a home loan is 90% of the price of the property. Meanwhile, the remaining 10% makes up the minimum downpayment.
To qualify, your MOF is assessed based on the following factors:
(a) Type of property you’re purchasing
(b) Location of property
(c) Age of borrower
(d) Income of borrower
Meeting the requirements based on these factors would establish better trust and financial accountability to the bank mortgage officer when applying for a home loan. Additionally, it will help you as the potential home buyer to be realistic with home purchasing decisions in terms of affordability and commitment to mortgage repayment. With these home loan tips, they will hopefully serve as a basic guide for first-time buyers in getting their first home.
Want to know if you’re financially eligible for a home loan? Use Gamuda Land’s Debt Servicing Ratio (DSR) calculator to know the maximum housing loan amount you are eligible for and increase your chances of getting a home loan approval!