Bank Financing
PROPERTY PURCHASE FINANCING
Property buyers will usually obtain bank loans to finance their property purchases, regardless whether it is a residential property, commercial property, industrial property or even agriculture land. Before applying for a bank loan, buyers will need to know their own loan requirements and criteria.
There are mainly 3 type of housing loans and they are Flexi Loan, Semi-Flexi Loan and Term Loan.
Before we can understand what a Flexi loan is, we first have to understand the principles behind the basic term loan and that of interest calculations for property loans.
Interest Calculations
The interest calculations for property loans follow that of the reducing balance method. Every time your installments are paid, a portion of it goes towards servicing the interest, while the remainder goes towards paying down the principal amount owed. When the principal amount owed is higher, a larger portion of the installment goes towards servicing the interest. This money is what some people call “burnt”.
It is to the benefit of the borrower to pay as little interest as possible. So some borrowers try to make additional payments and bullet payments (large payments of cash) to their loans whenever possible to reduce the principal amount owed. This helps to save on interest payable.
However, this presents another problem to the borrower known as a liquidity problem. What if they had an emergency and suddenly needed to use the cash?
Basic Term Loan
A term loan is a loan with a fixed repayment schedule. Back then, all property loans in Malaysia were basic term loans. It was not easy for a borrower to make additional payments to their loans. They had to write in to the bank explicitly to request for such an arrangement to be made possible.
Some borrowers made the mistake of making additional payments to their loans without explicitly requesting such an arrangement, thinking it would reduce the principal amount owed. It didn’t. The money just sat there in the bank (as Pre-Payment), neither earning an interest as a deposit, nor saving them interest on the loan amount.
Additionally, back then, any additional money paid to these term loan accounts in most cases could not be easily taken out in the case of an emergency. So borrowers had to be absolutely certain before they made any additional payments that it was not money they would need.
There were 2 reasons for such arrangements then:
- Banks were reluctant to let their customers reduce their principal amounts as they pleased because they earned money on interest payments.
- Banking systems and processes then were not as advanced as today.
Semi-Flexi Loan
Semi-Flexi loans are a natural evolution from the basic term loan. Not too long ago, banks in Malaysia started lowering the barriers for borrowers to make additional payments to reduce the principal amount owed. There was no longer any need to write in explicitly to request for such an arrangement. Additional payments made did not go in as Pre-Payment, but went to work immediately, reducing the loan amount.
Additionally, banks also made it possible for customers to withdraw any additional money paid ahead of schedule to the loan. However, this would incur some processing time, as well as a processing fee usually in the range of RM50 to RM100 per withdrawal from the loan account.
While not entirely liquid (meaning you could withdraw money as you please), the money still remains accessible in case of an emergency. Different banks have different procedures for withdrawing this money. Some still require the customer to write in, while others have made it accessible via their Internet Banking portals.
Today, all property Term Loans offered by the major commercial banks are Semi-Flexi by default.
Flexi Loan
At its basic, a fully Flexi loan is one that allows a customer to take out and put in money to the loan account as and when the customer pleases without incurring any additional charges or procedures. This is achieved by tying a Current Account to the loan. Every month, the installment amount is deducted from the Current Account as scheduled. But any additional money parked inside the current account will go towards reducing the principal amount owed.
So if a customer has taken a full Flexi property loan of RM500k with a bank and the customer has RM300k in cash parked inside the linked current account, interest calculations will only be based on RM500k – RM300k, saving the borrower RM300k in interest.
However, it should be noted that there 2 disadvantages to fully flexi loans:
- Typically, most banks charge a monthly fee for the maintenance of the current account, ranging from RM5 – RM10 a month.
- Between Term Loans and Full-Flexi Loans, some banks offer a better interest rate for a Term Loan.
Margin Of Financing
Depending on the market value of the property, the margin of financing can go as high as 95% of the property’s value. This is assessed on factors such as:
- Type of property
- Location of property
- Borrower’s age
- Borrower’s income
Loan Tenure and Features
Commonly, the length of a housing loan can last up to 30 years or when the borrower reaches the age of 65, whichever is earlier. Each loan package differs from one institution to another, so do not base your decision on any single feature. Look out for features like flexible repayment terms or graduated payment schemes to suit your repayment capability.
Houseowner Insurance
When you purchase a house, it’s extremely important that you provide insurance coverage for your home as this acts as a form of financial security for you and your loved ones. Consider the following insurance products:
- House Owner/Fire Insurance Policy
- Mortgage Life Assurance (MRTA)
When taking up a housing loan, you’ll need to be aware of your rights and duties as a borrower and that of the banking institution’s as you will be dealing with the banking institution for a long period of time.
For further details, please refer to Bank Negara Malaysia (BNM) banking information website as listed below :-
Or contact Bank Negara Malaysia (BNM) directly at :-
Bank Negara Malaysia
Jalan Dato Onn,
50480 Kuala Lumpur.
Tel : 1300 88 5465 / +603 2174 1717 (Oversea Call) / +603 2698 8044
Fax : +603 2174 1515 / +603 2691 2990
Website : www.bnm.gov.my
Or contact banking institutions directly at :-
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Affin Bank Berhad
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Alliance Bank Malaysia Berhad
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AmBank (M) Berhad
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BNP Paribas Malaysia Berhad
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Bangkok Bank Berhad
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Bank of America Malaysia Berhad
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Bank of China (Malaysia) Berhad
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Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad
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CIMB Bank Berhad
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Citibank Berhad
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Deutsche Bank (Malaysia) Berhad
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HSBC Bank Malaysia Berhad
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Hong Leong Bank Berhad
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India International Bank (Malaysia) Berhad
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Industrial and Commercial Bank of China (Malaysia) Berhad (ICBC)
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J.P. Morgan Chase Bank Berhad
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Malayan Banking Berhad (Maybank)
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Mizuho Bank (Malaysia) Berhad
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National Bank of Abu Dhabi Malaysia Berhad
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OCBC Bank (Malaysia) Berhad
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Public Bank Berhad
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RHB Bank Berhad
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Standard Chartered Bank Malaysia Berhad
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Sumitomo Mitsui Banking Corporation Malaysia Berhad
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The Bank of Nova Scotia Berhad (ScotiaBank)
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The Royal Bank of Scotland Berhad (RBS)
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United Overseas Bank (Malaysia) Berhad (UOB)
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Understanding BLR and Mortgage Interest Rates
In anticipation of the upcoming Budget announcements, many property seekers are waiting for the Government’s news on real property gains tax (RPGT), stamp duty on property purchases, goods and service tax (GST) and affordable housing programmes.
At the same time, many are awaiting indication on the direction for interest rates, whether loan servicing will become more expensive in the coming year.
While awaiting the announcement, let’s talk a bit about interest rates and try to understand what causes movements in the base lending rate. Most home loans today are floating/variable rate loans pegged to the base lending rate (BLR) in some way or another. Even the Base Financing Rates (BFR) used in Islamic mortgages track BLR closely.
So it’s natural that questions on BLR get asked of mortgage officers a lot: “Will BLR in Malaysia increase or decrease?” “What is the forecast of the BLR trend in Malaysia?” and very popular as of this time of writing, “How will the upcoming Budget affect BLR rates?” There are many who say it will go up, but some believe the opposite. So who is right and who is wrong?
Contrary to popular belief, BLR rates are specific to individual banks and not controlled by BNM, although they are highly connected to BNM policies. Banks determine their own BLR rates based on their internal cost of funds (how much it costs them to borrow money which they will lend out at a higher rate), which in turn is determined by the Overnight Policy Rate (OPR), the interest rate at which other banks lend to each other. The OPR, meanwhile, is determined by BNM. Whenever the OPR changes, most banks will follow suit and change their BLR by a similar quantum.
But what causes BNM to move the OPR up or down? That’s a million dollar question. In short, if BNM’s objective is to have more liquidity in the system (more credit moving in the economy instead of tied up in savings), they would lower interest rates. If they wanted the opposite (to reduce liquidity or credit), they would hike up interest rates.
BNM decides this based on global economic outlook, and its objectives with regards to inflation and growth, among others. For example, to encourage growth, central banks like BNM would decrease interest rates as cheaper funds means more people taking out loans. These loans should ideally be used to invest in new businesses and create jobs; at the very least, it buys goods and services which increases sales for businesses. The downside of this, however, is that when real productivity doesn’t keep up with the funds in the market, this results in more funds chasing the same amount of goods and services, which may drive prices up, resulting in high inflation. Furthermore, low interest rates also cause savings to leave the country in search of higher returns, which causes the Ringgit to depreciate. This causes imports to become more expensive, further driving up inflation.
Most analysts have opined that interest rates will likely not be increased until late next year. The moment that you believe that interest rates may go up, you might want to consider fixed rate loans. You can also compare the various types of loans in our home loan comparison wizard.Fixed rate loans will work in your favour if interest rates go higher in the future. However, you will likely have to pay a premium for the predictability over existing floating rate loan packages.
Source : The Star Malaysia > Loanstreet.com.my, 25 October 2013
