Education? Check. Fairly stable income? Check. What’s next? Well, to the vast majority of Millennials (or Gen Y) in Malaysia, the answer seems to be purchasing a property. Be it newlyweds searching for a nest to call home, or financially savvy young adults looking to invest in property, there is no shortage of house-hunting in the country. With that, comes the daunting decision of choosing the right housing loan.
If you’re a house-hunter, you need to be familiar with the types of housing loans available to you. You wouldn’t want to pick an ill-suited loan just because your neighbour said it was the best choice. With that said, here is a list of the different types of housing loans offered in Malaysia.
Conventional Loans
1. Basic Term
The Basic Term loan has a fixed repayment schedule that includes interest rates. For the entire loan duration (the maximum is 35 years), you would pay the same amount per monthly instalment.
For example, if your housing loan instalment is RM1000 for a 35-year loan tenure, RM1000 is what you pay for the next 35 years.
Evidently, the Basic Term loan is the most common choice because it offers a clear repayment schedule to customers without the fluctuating interest rates that other loans have. Another perk for this loan is that you get the luxury of lower interest rates!
However, there’s a downside. Let’s say you won the lottery, and you decided to clear your housing loan payments ahead of time. The bank will most likely take them as pre-payment for future months instead.
How does paying an additional 3% sound? Tragic, yes. But that’s the only way the bank will let you off the hook for breaking their system as they earn interest from your stable monthly payments. This penalty applies if you chose to settle your payment before the 5-year mark.
2. Semi-Flexi
As its name suggests, the Semi-Flexi loan offers customers a little more flexibility. If you wanted to, you could reduce the loan interest by using any extra cash on hand as an advanced payment. This method is ideal because it saves you money in the long run.
Now, here comes the semi part. It’s only partly flexible as any money you dump in as payment is pretty much locked in there. Unfortunately, that means that if you need immediate cash for that new Samsung phone, you have to look elsewhere. Unless you are willing to pay another penalty, that is.
3. Full-Flexi
If you opted for a Full-Flexi loan, your housing loan account would be linked to your current account. As a result, the monthly instalments get deducted from there. Unlike the Basic Term loan, any extra money paid both lowers the total amount owed to the bank and reduces interest rates.
With the Full-Flexi loan, you have all the flexibility of withdrawing from the account in case of emergencies. No penalties. If you think that there must be a catch, you’re not exactly wrong.
Let’s not forget that the interest rates for this type of loan are variable, meaning they’re likely to be high during fluctuations. Also, there’s a maintenance fee of around RM5-RM10 per month.
Besides that, the Full-Flexi loan is also not very common. Not every financial institution would have this as a housing loan option. Good things are hard to come by!
Islamic Loans
On the other hand, Malaysia offers a separate category of loans known as Islamic loans. The issuing of this loan is governed strictly by the highest Islamic financing Shariah Advisory Council of Bank Negara Malaysia. The council ensures all loans adhere to the Shariah principles, banning all activities that are considered haram, exploitative, or cruel.
Unlike conventional loans, Islamic loans do not operate under the concept of lending money with interest (riba) which goes against their values. Instead, they offer buy-and-sell, lease, or partnership schemes.
Contrary to what you may think, Islamic loans are available to both Muslims and Non-Muslims. So, if you’re interested in alternative ways to finance your home, Islamic loans could be the way to go.
1. Bai’ Bithaman Ajil (BBA)
In this scheme, the bank sells you a property bought at market value. You would have to pay an agreed price, including a mark-up for the bank’s profit. Like regular loans, this loan lets you pay in monthly instalments, but there won’t be any interest charged.
2. Musharakah Mutanaqisah (MM)
For Musharakah Mutanaqisah financing, you and the bank would agree to buy a property together. This partnership means that you (the borrower) would be a tenant to the bank. In return, you would eventually have to buy the bank’s share of the property over time.
For example, 90% of the property belongs to the bank, while you own 10% of it from the partnership. As you submit your monthly payments, the bank’s shareholding decreases from 90% to 80%, and so on. This reduction continues until you own 100% of the property and the bank owns none.
3. Al-Ijarah / Ijarah Muntahiyah Bittamlik
Translated to: rent ending with ownership, this loan offers you the option of being a renter of the property. The concept works with the bank initially purchasing the home before renting it out to you. In essence, the bank becomes your landlord as you stay in your home.
Just like a typical tenant, you’ll have to make monthly payments as rent. Eventually, you would finish paying the total amount, and the property will be yours. This scheme could be a good option for anyone who can’t afford to go into a partnership.
If you’re starting to wonder if renting or buying is better, let us help you break down the pros and cons of each. Explore renting with our Rumah-i App, where finding your dream home can’t get any easier.
