No thanks to rising property prices, buying a home is usually the one biggest investment that people make in life. Incidentally, it is also usually the one event that puts people in their biggest debt. There is good news though as with the right knowledge and discipline, home loans are not as intimidating as they seem to be for us regular consumers. iProperty.com checks with four prominent financial institutions in the country on home mortgage matters.

Representatives from the four financial institutions sharing their thoughts with iProperty.com readers on home mortgage

In past months, iProperty.com uncovered thoughts from many property developers and real estate agents that the current market situation presents the best opportunity to purchase a home, nevermind the fact that they are the ones selling them.  

Their views are not without reason as Base Lending Rate (BLR) is currently in its lowest point in history. In addition, property developers have been issuing very attractive property ownership incentives spurred by the weaker economy due to the global recession. Then let us not forget the old investment adage that property is a good hedge against inflation1.

Today, property developers have in place incentives that make it easier for people to purchase property by reducing its costs of entry. Low downpayment, zero interest during construction, free stamp duty and legal fees disbursement for sales and purchase agreement and zero entry cost financing are some examples of the incentives.

Not many can afford paying for a home purchase fully in cash which is why it is common for most people to have a need for home mortgage loan. The type of home loan taken depends on every individual needs, expectations and repayment capabilities.

Types of home loan

In general, there are three common housing loan packages offered in the market by financial institutions. These are term loan, overdraft facility or a combination of both. Table A illustrates their key differences.
 

Table A: Key differences for common housing loan packages

Home loans currently offered in the market are based on any one of the three housing loan packages and are tailored into different packages depending on individual needs. It is better to check with several financial institutions on what home loan products they have to offer and speaking to their representatives before deciding on a home loan package.

“Our top selling product is the conventional Home Flexi and Islamic Flexi Home Financing-i. Both these products are linked to current accounts and deposit balances and additional payment will offset the principal or outstanding amount. This reduces the amount of interest, or profits in the case of Islamic financing, to be paid. Customers also have the flexibility of repayment and the ability to redraw their pre-payment for various funding needs,” explains Peter England, head of retail banking of CIMB Bank.

Peter continued that more than half their customers opt for such flexi financing and the Islamic Flexi Home Financing-i package saw over RM200 million in sales in the first three months of its launch. CIMB also offers conventional and Islamic financial packages with fixed and floating rates as well as an investor package.

Malayan Banking Berhad (Maybank) head mortgage, mortgage and automobile financing department, Abdullad Bin Abdul Rahman says of one of the many packages they have to offer, “Combination of term loan and overdraft (packages) offers the best of both worlds and the ratio of the term loan to overdraft is flexible and only subject to a minimum amount of RM10,000 for each facility type.”

Abdullah adds, “We (Maybank) offers several payment options to ease the customer’s monthly commitments especially during the critical initial period of property purchase. The ‘Zero Payment’ benefit provides customer with the option of not having to pay a single cent during construction period, thereby freeing funds for their other monthly commitments e.g. rental, etc, as the progressive interest is capitalised into the loan during the property construction period.

“The ‘Pay Half’ benefit allows customers to repay their housing loan up to only 50 percent of the original loan amount. The balance of the 50 percent can be deferred until the end of the loan tenure. With this, the instalment amount will be lower compared with standard housing loan.

“The ‘Pay Later’ benefit allows customers to pay the remaining balance of the loan through a lump sum payment with their EPF or translate it to second generation loan. The ‘Pay Less’ provides customers extension of the loan tenure up to 40 years or age 65 whichever is lower, and lower monthly repayment.”

Meanwhile, for Citibank, director of mortgage business Goh Ching Chee opines that the financial savvy, investors and those who prefer freedom to decide and have control over their finances will choose their Citibank Homecredit product.

“It gives them the power to manage their finances with greater flexibility to deposit and withdraw in any amount anytime, without prior notice or penalty. It does not demand a fixed monthly instalment amount, no maintenance fee and commitment fees,” explains Goh.

Goh adds, “First time house-buyers and the more rate conscious who want a plain vanilla home loan as opposed to flexibility, a popular choice is Citibank Housing Loan, which allows them to pay a fixed monthly instalment over fixed loan tenure. The customers have the option to deposit more than their monthly instalments into their housing loan account for immediate interest savings. Nevertheless, the additional amount cannot be withdrawn. For customers buying under construction properties, they can commence their monthly repayment during construction period to enjoy more savings and shorter repayment method.”

As for ING Insurance (ING), the financial institution offers ING Fixed Rate Home Loan, a product that is split into two packages, non-zero entry cost and zero entry cost. Non-zero entry cost does not cover the cost for loan documentation fee for customers while zero entry cost package does. The former package offers a lower interest rate compared to the latter.

ING head of mortgage, Lim Keatky explains ING only offers a fixed rate home loan which fixes interest rate for the entire duration of the loan tenure. As of the time of the article, ING is offering their lowest fixed interest rate in local history which is 4.85 percent for non-zero entry cost package. Unlike floating rate loans based that are based BLR or KLIBOR (Kuala Lumpur Inter-Bank Offered Rate), fixed interest rate stay even when variable rate or base lending rate packages move downwards.

Floating rate versus fixed rate

Floating rate and fixed rate are two types of interest rates offered in the market. BLR and KLIBOR are two variations of the former which are interest rates pegged against a base rate which may change from time to time depending on market sentiment.

BLR rates are tied to Bank Negara’s overnight policy rate (OPR) while KLIBOR rates are tied to interbank rates.

Peter says, “Fixed rate lock in the financing at a given rate, giving customers a certainty. Both floating rates and floating rates and KLIBOR based rates fluctuate with the changes in the overnight policy rate or interbank rates which in turn are subjected to the economic conditions.”

“KLIBOR is more volatile (compared to BLR) and may vary daily as it is more sensitive to market sentiment.

“In a market wherein rates are expected to increase rapidly and significantly, fixed rate could be a good option because consumers have the peace of mind and assurance that their rate will not increase and they will continue to pay the same fixed repayment,” opines Goh.

But not all is rosy with fixed rates as Goh continues to explain, “However, in the event rates are dropping, consumers with fixed rates will not enjoy the benefits of the lowering rates unlike consumers with floating rate mortgages. Consumers with floating rate mortgage take the risk of higher rates when it increases, but obtain the benefits when rates drop.”

Lim from ING adds, “Homeowners should be aware of one’s financial planning needs i.e. whether to opt for long term or short term financing, their investment appetite, preferences of not just getting loans but the additional value added offerings such as insurance protection. These factors will ultimately determine their choice of a home loan, whether to opt for fixed rate or floating rate package.

“While short term rate is now at its historical low, inflation would not stay low continuously. Malaysian economy for instance is expected to regain growth next year, and when that happens, there could be an upward movement in terms of interest rates and investors need to be aware now of other alternative mortgage loans which will allow them to lock-in their borrowing cost and without having to worry (about) any increasing rates in the future.”

Before deciding on a loan

Buying a house is a long term commitment and choosing a home loan package is not a decision to be taken lightly.

“Before deciding on any form of home financing, it is best to establish how much you can afford to spend each month servicing the financing,” says Peter. He adds that customers who intend to leverage on EPF withdrawals as a means to repay their financing can opt for CIMB’s ‘Pay Half’ package whereby instalments are based on half the principal amount while the remaining instalments are based on repaying both the principal financing amount and the interest rates.

Abdullah says, “Total commitment (i.e. the monthly instalment for the new facility plus any other existing commitments like car loan) should not be more than a third of the monthly income.

“Assuming interest/profit rate at BLR minus 2 percent and BLR is current at 5.55 percent, with a loan tenure of 25 years, the monthly instalment for every RM1,000 loan amount is RM5. So if a person earns RM5,000 per month, and has no other commitment, the maximum loan he can borrow is about RM333,000 (RM5,000 x 1/3 x RM1,000/RM5). Or for every RM1,000 salary, he can borrow about RM66,000.”

“Check for the variety of payment options that can meet your different financial needs. Opt for convenience offered by the bank i.e. convenience of Maybank2u (online banking) for viewing of account details, making payment to the loan accounts and related billings,” adds Abdullah.

Meanwhile, Goh from Citibank advises, “Do a lot of research and get as much information as possible – compare the features, benefits, terms and conditions that come with the financing packages offered.

“Consumers tend to look at interest rates offered by the financial institutions. However, interest rates should not be the sole consideration in the selection process of an appropriate home loan package. For example, it will not make much sense if for a lower interest, the customer suffers from service that is not up to par.”

Goh adds that when a home loan package has been decided, it is advisable to be disciplined to make regular payment and have a good track record. According to him, a blemished track record may affect one’ ability to seek additional loans and facility in the future. Meanwhile, making additional payment than the required monthly instalment can yield long-term savings and benefits.

“As most of the mortgages in the market are on daily calculation, regardless whether it is fixed or floating rate, technically early or extra payments in general would shorten the loan tenor and allow consumers to enjoy savings on interest payment. However, consumers have to check the terms and conditions of the mortgage offer to see whether there is any restriction and pre-defined conditions that may limit the early or extra payments,” advises Goh.

Peter shares his thoughts, “Most home financing is subject to a lock in period i.e. customers are expected to maintain a five years tenure with the bank. If customers choose to settle in full, within the contracted lock in period, there is generally a penalty of around three percent of the financing amount. However, we (CIMB) also offer an investor package that offers low or no lock in period for customers who intend to sell their property much earlier.”

Should home loans be taken with future refinancing in mind?

According to Abdullah from Maybank the answer is yes, “Future refinancing is an advisable step for home buyers. Refinancing means you move your housing loan from your existing financier to another financier. By refinancing, you can get ‘extra’ cash by taking advantage of your property’s rising value to obtain a larger loan amount. In a nutshell, your refinanced loan pays off your current home loan and you can utilise the balance to do whatever you wish.

“You should consider refinancing if your home is more than five years old, it is likely that you are servicing your loan at a higher interest rate that what is on offer by financial institutions today. Many borrowers are complacent with their current loan or they wait till their lock-in period expires before thinking about refinancing.”

Abdullah added that refinancing is considered an early settlement of a home loan and may be subject to penalty if it is within the lock-in period.

Peter advises a more cautious approach. He says, “Refinancing a property can be costly as it may incur cost such as legal and transfer fees. Sometimes, these fees form part of the refinancing, and incur finance charges. CIMB Bank’s Prime Mortgage, under our Prime Plan, has an option to re-price, at the end of the lock-in period. This gives our Prime Plan customers the peace of mind – that they are not unnecessarily locked-in to an unattractive rate for long tenures. We advise customers to review their options with us instead of refinancing with other banks.”

Lim shares his view that homeowners should only consider refinancing upon exploring with their existing financier on their home loan needs.

“Customers choose to refinance their home loans choose to refinance their home loans for several reasons. They may want to reduce their borrowing cost and financial burden as refinancing is usually done at lower rates; extend their repayment time, so that they have more disposable income or even leverage on their property for standby funds for children’s education, contingencies as well as to capitalise on opportunities that may arise,” says Goh.

Getting the Home Loan Package

Consumers should continuously arm themselves with knowledge to help them make informed decisions on their finances, whether it is for property purchase or not. It is advisable to speak to several reputable financial institutions to see what they have to offer you and then see if it meets your financial goals and capability.

Once you have decided on a home loan package, you need to provide the following documents to the financial institution that you are applying the loan from:

There may be a need for additional documentation depending on the chosen financial institution.

Apart from the initial 10 percent (or more) downpayment deposit for the purchase property, one should also allocate another five percent off the purchase price of the property for additional costs such as legal fees and stamp duties. The maximum loan tenure is normally capped at 30 years or until the borrower reaches 65, whichever is earlier.

Disclaimer: This article is meant to provide a general overview of housing loan facilities and is not a substitute for professional financial advice. Readers are strongly advised to seek professional legal and financial advisors and practice due diligence before they sign up for home financing packages.

 1 Land is a limited commodity and has historically shown appreciation over time. Be warned however, that there are also several other governing factors that dictate if a property will rise or fall in value. Besides its location, factors that influences the value of property includes but is not limited to: Tenure status (Leasehold/Freehold), price of entry, cost of borrowings, etc. For example, leasehold properties tend to depreciate in value as it nears its end of tenure.