MORTGAGE PLANNING

mortgage

When seeking a home loan to finance a property, ascertaining the type of loan you want is one of the first and most important questions you have to ask yourself. In Malaysia, that usually means choosing from one of the three major categories: Basic Term, Semi-Flexi or Full-Flexi.

If you’re relatively inexperienced in mortgage products, read on and allow us to shed some light on the major differences in order to help you choose a loan that truly fits your requirement.

1) Basic term
A basic term housing loan is one that comes with fixed repayment schedule, where the monthly instalment you pay is the same throughout your entire loan period.

Generally, a loan of this category does not allow you (or make it exceptionally hard for you) to reduce your loan interest with advance payment. Any additional payment you make is merely treated as pre-payment for future instalments, and does not affect the total interest you’re paying on the loan itself. You can, however, write in to the bank and request for special considerations, which may, or may not, be granted at the discretion of the bank.

In the past, basic term home loans used to be the most common type of loan for home buyers in Malaysia. Nowadays, they are not as prevalent as they simply do not offer the kind of repayment flexibility required by the modern home owners.

2) Semi-flexi
A semi-flexi housing loan is a type of home loan that comes with a built-in facility enabling borrowers to make advance payment to lower their loan interest without the need to make any formal request to the bank.

With a semi-flexi loan, any additional amount you repay on top of the normal monthly instalment is automatically used to reduce the principle loan amount, subsequently lowering the amount of interest you’re being charged for your home loan. If you like, you could also make a request with the bank to withdraw the additional payment you’ve made, though you’re likely to incur some charges during the process.

Compared with the full-flexi home loan, a semi-flexi home loan is considered a preferred option for those with spare cash and flexible income, due to the potential to save on loan interest.

3) Full-flexi
Full-flexi home loan (or just “flexi loan”) takes the notion of flexible payment to the next level, enabling borrowers to make advance payment to lower their property loan interest and withdraw the additional payments they’ve made whenever they like, without the need for complicated procedures, or additional charges.

In a typical flexi loan package, you get a property loan account that is linked to a current account with a chequebook. Every month, loan instalment is automatically deducted from the current account and paid to the property loan account. By depositing additional sum of money into the said current account, you’ll also be able to offset your principle loan amount and reduce the interest on your property loan.

Example:
If you have a flexi loan of RM300,000 and you’ve deposited RM100,000 into the linked current account, your loan interest will based on RM300,000 – RM100,000 = RM200,000.

Just like a semi-flexi loan, you’ll be able to withdraw the additional payment you’ve made, simply by writing a cheque using the chequebook provided. The process is much easier because you do not need to make a request with the bank, as in the case for a semi-flexi loan.

Take note that most flexi loans do come with a fixed monthly fees (usually RM10 per month) to maintain the current account, so you might need to evaluate the financial commitment against the convenience of a flexi-loan before you make a decision.


Islamic vs Conventional Financing
Conventional Financing Principles
In Conventional Financing, lenders lend to borrowers to make a profit from the interest charged on the principal amount. For property loans, borrowers pay an interest on the outstanding principal amount. Interest rates can be a fixed rate or based on a floating rate (e.g. BR, KLIBOR).

Payment is made over a set tenure by installments. A portion of each installment paid goes towards servicing the interest, while the remainder goes towards paying down the principal.

Since the contract is not based on an absolute value (e.g. A sale price), the sooner the borrower can pay down the principal, the cheaper the amount of interest paid.

The loan contract for Conventional Financing is known as a Loan Facility Agreement.

Islamic Financing Principles
Islamic Financing avoids interest-based transactions (riba), and instead introduces the concept of buying something on the borrower’s behalf, and selling it back to the borrower at profit. In place of interest, a profit rate is defined in the contract. Like Conventional Financing, profit rates can be a fixed rate, or based on a floating rate (e.g. BFR).

The majority of Islamic home financing options in Malaysia today are based on the Bai Bithamin Ajil (BBA) concept. A small number of alternatives are based on the Musyarakah Mutanaqisah (MM) concept (which will not be covered in this article).