Why Bank Negara’s New Home Loan Policy Doesn’t Harm Home Buyers?
On 5 July 2013, Bank Negara Malaysia (“BNM”) imposed new lending regulations which included a policy stating banks could no longer offer a home loan period of more than 35 years (previously, some banks were offering mortgages with tenure as long as 45 years).
If you’re in the midst of buying a home in Malaysia, the change could come as a huge surprise and may even throw a spanner into your home buying endeavour. In this article, we’ll show why it shouldn’t, and how you actually have everything to gain from the new 35-year cap.
1) It stops you from paying obscene interest on your home
In order to understand why the 35-year cap on home loan period is actually beneficial to you, you’ll have to understand that the move was taken by BNM to lower household debts in Malaysia; and one of the largest contributing factors to household debts is the high interest we’re obliged to service every time we take up a loan.
When BNM reduces the maximum loan amount from the industry practice of 45 years to 35 years, what it is in fact doing is reducing the amount of interest you could potentially subject yourself to when you take up a home loan.
For a home loan of RM500,000 at a rate of 4.2%p.a.
Interest you pay over 45 years = RM614,020
Interest you pay over 35 years = RM455,080
You save = RM158,940
*Calculated using iMoney’s Home Loan Calculator
For home buyers whose tendency is to go for maximum loan periods (for wrong reasons such as to elevate your lifestyle via reduction in monthly installment), the 35-year limit may have just saved you from paying hundreds of thousands of Ringgit in additional interest. And of course, less interest could only be a good thing for you in the long run.
2) It stops you from buying beyond your means
Some see it as an obstacle to their home-buying endeavors, but understand that the placement of a 35-year cap does not actually stop you from buying a home. What it does, is serves as a very effective “force mechanism” that limits the purchase of properties you really can’t afford in the first place.
When home loans can be stretched all the way to 45 years, there is a very big possibility that you could be lured into buying properties way beyond your original budget, because you could simply drag the monthly installment to “affordable” level by extending your loan period to the max.
– With an interest rate of 4.2% p.a., a home valued at RM500,000 can be financed at approx. RM2,445 per month over 30 years
– By stretching the loan period to 45 years, you could buy a RM600,000 home for roughly the same monthly repayment amount.
The consequences: An additional 15 years of being in debt for your home!
While it is not wrong to aim high when it comes to buying a dream home, there is no harm in having a mechanism that literally forces you and millions of fellow Malaysians to re-think about what you can or cannot afford – which is what the 35-year cap essentially does. Considering that Malaysia’s household debt is reportedly a staggering 140% of our disposable income, most of us probably need this mechanism to curb our buying instinct.
3) Actually, it might not affect you at all
Lastly, you’ll want to know that there is a strong chance the 35-year limit would not impact your housing loan application whatsoever, because most people do not get the loan with terms beyond 35 years anyway.
Prior to July 5, 2013, many banks in Malaysia did not actually offer a maximum home loan period of 45 years. Instead, most banks offered home loans of up to 40 years, or until the borrower turned 65, whichever was earlier.
So say you took a housing loan at age 30 under the previous guidelines, you’re most likely to be offered a maximum term of 35 years by majority of the banks in Malaysia. That is the same as what you’ll be getting under the new guidelines!
On the other hand, if you received an offer for a home loan of more than 35 years, it’s very likely that you’re still unaffected by the new policy because you would have applied for the loan prior to July 5, 2013 (and BNM has specifically stated that all applications made before the said date would remain unaffected).
Either way, it works out to be the same for you!