Which Type Of Home Loan Is Right For You?
Been shopping around for a home loan?
Finding your dream home is exciting but figuring out how you will pay for it is an important step to seal the deal.
Most Malaysians will need to apply for a loan to buy their house which brings us to your next big decision – choosing the right home loan.
In general, property loans in Malaysia can be categorised into two different groups – conventional and Islamic.
Here’s what you need to know about each category and the types of loans under each category to choose the best home loan for you.
Conventional home loan
Conventional loan accounts for a large majority of the total housing loans in the market. In a conventional housing loan, a borrower agrees to repay the loan amount together with interest over an agreed loan period.
Banks normally charge either a 1) fixed or 2) variable interest rate on conventional loans (or a combination of the two). Most property loans in Malaysia are variable interest rate loans, with the interest rate tied to the base lending rate (BLR) of banks.
The most common conventional home loans in Malaysia are term loan, semi-flexi loan and flexi loan. What makes them different is the way that instalments and interests are calculated for each type of home loan.
This type of loan provides fixed monthly instalments. The interest rate for a term loan will not change over the years, even if you make additional repayments ahead of schedule. In fact, there may be penalty clauses imposed by banks for those who settle this type of loan within the first
Just like its name, this type of loan allows flexibility when it comes to the loan interest rate you need to pay. You can pay up more money towards the loan which will lower the amount of interest you need to pay.
Flexi home loan
These loans are similar in nature to semi-flexi loans, except that these are linked to your current account, and the instalment amount is automatically deducted every month. If you make any additional payments, you’ll be able to withdraw from them whenever you like. Each month, the loan instalment is automatically deducted from the linked current account, and the balance will go towards reducing the amount owed on the loan.
Besides these main types of home loans, there are also other options like refinancing loans, government housing loans and joint home loans which are available for those who qualify under those categories of borrowers.
Islamic versus conventional home financing
Islamic home financing
While Shariah-based Islamic Home Financing products on surface have the same characteristics as conventional housing loans, they are based on different concepts and principles.
In a conventional housing loan product, banks earn interest from the borrower. In contrast, Islamic home financing products are not interest-based (hence you will seldom see the word “loan” being used in Islamic products, as “loan” suggests an arrangement which involves an interest payment).
Islamic home financing in Malaysia typically comes in two types – Bai’ Bithaman Ajil (BBA) or Musharakah Mutanaqisah (MM).
Bai’ Bithaman Ajil (BBA) home financing
BBA home financing is based on a buy-and-sell concept. In a BBA home 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 mark-up for the bank’s profit.
The bank and the customer would then agree to a term and an instalment amount. No interest is charged.
Musharakah Mutanaqisah (MM) home financing
MM home financing is based on a partnership concept. In a MM home financing, the customer and the bank jointly buy and own the property. The bank then leases its share of property to the customer, and in return, the customer promises to buy the bank’s ownership in the property. The customer pays rental to the bank under ijarah, of which a portion of the payment is used to gradually purchase the bank’s share in the property.
Signing up for a home loan or financing is a long-term commitment for most people so it’s a financial move that you must prepare for carefully.
Don’t forget that owning a property also comes with other financial commitments besides a home loan, like paying for the downpayment, various fees and charges to legally own the property as well as the annual land taxes you need to pay as a property owner.
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