It is every Malaysian’s dream to own their own home or invest in a piece of property for long term gains. However, many are not familiar with the types of financing available to them. In order to understand how home loans work, those interested in taking these loans must first understand terms like ‘down payment’, ‘margin’, ‘interest rate’ and ‘base lending rate’.
To simplify things, ‘down payment’ is what potential owners pay upfront for the property, usually 10% to 20% of the total price. ‘Margin of Financing’ is the percentage of the property’s price that the bank loan covers, usually 10%-20%. ‘Interest rate’ is the rate of interest charged on the house loan you are taking by the bank. ‘Base lending rate’ is a rate set by bank Negara Malaysia to guide banks in determining the interest rates to charge on home loans.
Now that the basic are out of the way, let’s look at the common types of loans that Malaysian banks offer:
Conventional or Standard Home Loan
This type of home loan is a very traditional system whereby you pay a fixed amount of money back every month with either a fixed interest rate or variable interest rate (that is linked to the base Lending Rate). There is also a fixed time period to pay back the loan.
The competitive modern loans market has caused banks to come up with more creative loan packages for customers. One example of a flexi home loan allows you to pay a minimum amount or more each month over a loose period of time.
Another type of flexible loan allows you to place a portion of your loan repayment into a current account or investment account that can generate some income. You can then use the investment account’s interest earned to help offset some of the loan. Some loan packages also allows you to withdraw any excess payment or excess interest earned for your own use.
These examples are only some of the types of loan package offered by various banks.
Islamic Home Financing
Islamic banking employs a system that on the surface looks similar to secular banking practices. However, according to Sharia law or Islamic law, banks are not allowed to charge interests. Therefore in Islamic home financing, the bank employs either one of two concepts.
The first concept involves a process whereby the bank buys the property you want at market price. After that the banks sells it back to you at the same price plus some extra mark up, considered profit for the bank. You then buy the property from the bank by paying instalments.
In another Islamic banking concept, the bank and buyer both share ownership of the property. The owner then agrees to buy the bank’s share of the house by paying monthly ‘rental’, of which a portion of this ‘rental’ is used to buy back the bank’s portion of the house.
We hope that these explanations will help future property owners make wise decisions regarding the types of financing available to them and the type of loan most suitable to their current situation and needs.