How To Choose The Best Home Loan
Have you looked for a mortgage?
Finding your dream home is exciting, but figuring out how you’re going to pay for it is an important step in closing the deal.
Most Malaysians will need to apply for a loan to buy their home, which brings us to your next big decision: choosing the right home loan.
In general, home loans in Malaysia can be classified into two different groups – conventional and Islamic.
Here’s what you need to know about each category and the types of loans within each category to choose the best home loan for you.
Conventional real estate loan
Conventional loans represent a large majority of the total home loans in the market. In a conventional home loan, a borrower agrees to repay the loan amount with interest over an agreed loan period.
Banks normally charge a 1) fixed or 2) variable interest rate on conventional loans (or a combination of both). Most home loans in Malaysia are variable interest rate loans, with the interest rate tied to the banks’ base lending rate (BLR).
The most common conventional home loans in Malaysia are term loans, semi-flexible loans, and flexible loans. What sets them apart is how the installment payments and interest are calculated for each type of home loan.
This type of loan provides for fixed monthly payments. The interest rate on a term loan will not change over the years, even if you make additional payments earlier than expected. In fact, there may be penalty clauses imposed by banks for those who settle this type of loan in the first
Just like the name, this type of loan allows for flexibility in the rate of interest you have to pay. You can pay more money for the loan, which will reduce the amount of interest payable.
These loans are similar in nature to semi-flexi loans, except that they are tied to your checking account, and the down payment amount is automatically deducted each month. If you make additional payments, you can withdraw them whenever you want. Each month, the loan deposit is automatically deducted from the linked checking account and the balance will be used to reduce the amount owed on the loan.
Besides these main types of home loans, there are also other options like refinance loans, government home loans and joint home loans that are available to those who qualify in these categories of borrowers.
Islamic or conventional real estate financing
Islamic real estate financing
Although Sharia-based Islamic housing finance products have the same characteristics as conventional home loans, they are based on different concepts and principles.
In a classic home loan product, the banks collect interest from the borrower. In contrast, Islamic housing finance products are not interest-based (hence, you will rarely see the word “loan” used in Islamic products, as “loan” suggests an arrangement that involves payment of interest) .
Islamic housing finance in Malaysia generally comes in two types – Bai ‘Bithaman Ajil (BBA) or Musharakah Mutanaqisah (MM).
Bai ‘Bithaman Ajil real estate financing (BBA)
BBA real estate financing is based on a concept of buying and selling. Under BBA real estate financing, the bank first buys the property at the current market price and sells it back to the customer at an agreed price. This agreed price includes the actual cost of the property plus a markup for the benefit of the bank.
The bank and the customer would then agree on a payment term and amount. No interest is charged.
Real estate financing in Musharakah Mutanaqisah (MM)
MM real estate financing is based on a partnership concept. In MM real estate financing, the client and the bank jointly buy and own the property. The bank then rents its share of the property to the customer, and in return, the customer promises to buy the bank’s property in the property. The customer pays the rental to the bank under ijarah, part of the payment of which is used to gradually purchase the bank’s share in the property.
Taking out a home loan or financing is a long-term commitment for most people, so it’s a financial move you need to prepare for carefully.
Remember that owning a property also comes with other financial commitments in addition to a home loan, such as the down payment, various fees and charges to legally own the property as well as annual property taxes. that you have to pay as the owner.
What Is Home Loan Refinancing and How Can I Do It?
What are the advantages of taking an Islamic home loan?
Can You Get Approved For A Home Loan?
Is prepaying your mortgage a good idea?
This article was first published on September 28, 2012, and has been updated for freshness, accuracy and completeness.
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