Here are seven useful tips if you’re planning to take a home loan in Malaysia.
1. Understand the different kinds of home loan products
- Conventional loans: You have to repay the borrowed sum with interest at the prescribed rate to the bank. This rate depends on the bank’s Base Rate (BR) that’s variable, and fixed interest rates.
If you miss a payment, you could be charged with compounded interest that may be capitalised and subjected to additional interest.
- Islamic financing: Involves a principle of diminishing partnership, wherein you as a buyer and your bank jointly own the property you wish to buy, for a specified lease period. You pay a monthly rental that serves to redeem the bank’s share of your home and once this period of the lease expires, you are the sole owner of the property.
2. Never take a loan you cannot afford
- Stick to your budget: Fix a budget based on your affordability before looking for a house and try your best not to exceed it.
However, don’t compromise on the basics like space, connectivity and location. Instead, boost your savings further so that you’re able to afford it.
• Keep a check on your total loan commitment: There is a cap on your total loan commitments (personal loan, car loan, credit card dues and new home loan instalment) called Debt Service Ratio (DSR).
Usually, DSR is a maximum 70% of your net monthly income (it’s at times lower for lower income groups and higher for upper income groups).
3. Decide on your ‘loan flexibility’
- Term loans come with a fixed interest rate and loan tenure, which means you pay the same sum every month until the end of your loan tenure.
However, you don’t get any flexibility when it comes to paying more than your monthly instalment and reducing the overall interest that’s payable to the bank.
- Fully flexible loans means you pay additional amounts whenever possible. Interest rates are calculated every day against your loan’s reducing balance. As the loan is linked to a current account, all additional payments can be withdrawn in case of an emergency.
- Semi-flexible loans means you pay a fixed monthly instalment for the loan tenure. Additionally, you’re allowed to make part payments if you wish to pay off the loan quickly.
The downside to semi-flexible loans is that you incur penalties in case you withdraw the part payments for an emergency.
4. Keep track of reforms impacting the mortgage industry
Bank Negara Malaysia (BMN) constantly introduces updates and reforms in the field of mortgage financing. From a cap on financing in case of multiple properties to a limit on the amount you can borrow, there’s a number of home loan policy changes and announcements you must keep a track of before you commit to buying a new home.
5. Start working towards improving your credit score today
Your credit score makes a huge impact in determining what kind of home loan packages banks will offer you. So start clearing outstanding debts on your personal loan, car loan and credit card, never missing any payment deadline and avoiding fresh personal loan or credit card applications without repaying existing dues.
6. Ace the ‘interest rate’ game
- Shop around: Don’t settle for the first home loan offer. Do extensive online research about other banks, consider the pros and cons, and take the best option.
- Even ‘low-interest rates’ come at a price: Loans with lower interest rates usually come with less flexible terms, such as a five-year lock-in period or a high penalty in case of early settlement.
- Negotiate: Based on your financial standing, job stability and credit score, a bank might give you a better home loan offer if you negotiate properly.
Reach out to the bank that handles your main account (salary savings or current). It’s not uncommon for banks to walk the extra mile to retain their existing customers by extending better offers at lower interest rates.
7. Consider going for Mortgage Reducing Term Assurance (MRTA)
Buying insurance on top of your home loan costs can just seem like a needless addition. However, MRTA can be extremely useful, especially when you don’t have life insurance coverage.
With MRTA, your mortgage payments are completely covered in case of your death or if an accident leaves you permanently disabled. MRTA can also serve as extra protection for you and your family if you have life insurance.
This article first appeared in BBazaar.my
BBazaar Malaysia (BBazaar.my) is part of BankBazaar International, the world’s leading neutral online marketplace that helps people decide on financial products such as insurance, credit cards, fixed deposits, saving accounts, mutual funds and many more.