Understand Home Loans

Buying a house is probably the most important purchase you'll ever make. Your home loan is likely to be not only your biggest household expense, but the largest financial commitment of your lifetime. For this reason, we've compiled a short guide to explain how a home loan works, and what you need to know before you apply for a home loan.

What is a Home Loan

To put it simply, a home loan is a loan used to purchase property. Home loans are also commonly referred to as 'mortgages'. In Malaysia, home loans are available from banks, building societies, specialist mortgage lenders such as insurance company and employers .

If you already have an existing home loan and want to change to another product or lender without moving home, it is known as a 'refinancing'.

How do Home Loans in Malaysia Work

When you take out a home loan in Malaysia, you enter into an agreement with the lender (usually a bank) and promise to repay your loan over an agreed length of time (also known as the 'loan tenure').

Interest rates for housing loans in Malaysia are usually quoted as a percentage below the Base Lending Rate (BLR). For example, if the current BLR is 6.6%, the interest rate on a "BLR - 2.4%" loan would be 4.2%.

In a typical Malaysian home loan, you make monthly payments for an agreed period (i.e. the loan tenure) until you've fully repaid both the principal of the loan and the interest. During the early years of the home loan, the majority of your monthly repayments are used to repay interest on the loan, however, as time passes, a larger proportion of your repayments will go into paying down the loan principle.

Because your housing loan interest is calculated based on what you owe on your home loan each month, by paying a little bit extra each month, the interest on your loan in subsequent months will be lower.

Some factors you need to be aware of when you choose a home loan

Margin of Financing: the margin of financing is also known as the loan-to-value ratio. The margin of financing is the amount of your home loan expressed as a percentage of the property's value. The lower the margin of financing, the more 'equity' there is in the property. The margin of financing could go as high as 95% (of the value of the house), and is assessed on factors such as:

• Type of property
• Location of property
• Age of the borrower
• Income of the borrower

Early Termination Penalty: Some mortgage lenders may apply an early termination penalty if the loan is paid off in part or in full within a specified time period, including if you refinance the loan with another lender. This specified time period where you are liable to pay an early termination penalty is called the 'lock-in period'. Depending on the term and size of your home loan, this charge can be quite significant.

Home Loan Fees & Charges: There are a number of related costs (such as professional fees and government charges) that you would have to pay when you take out a home loan. Some common fees and charges you would expect to incur include:

1) Stamp duties: Sale & Purchase Agreement (0.5% to 1.0%), Loan Agreement (0.5%) and Transfer of Title (1.0% to 2.0%)
2) Disbursement Fees: varies by state, land office and type of property
3) Processing Fees: one time charge by the lenders (up to a few hundred Ringgit).

Common Home Loan Terms

Base Lending Rate (BLR): The BLR is a reference interest rate used by banks to decide how much to charge for various products they offer. It is a rate that takes into account banks' cost of operations, and is typically similar among the major banks. In Malaysia, home loans are normally quoted as a percentage above or below the BLR. This means, if the BLR increases or decreases by a certain amount, the interest rates charged on floating rate home loans also increase or decrease by the same amount.

Downpayment: An upfront payment made by the buyer of a house or car (or other highly priced goods/services). Downpayments are typically expressed as a percentage of the full purchase price. For example, a 5% downpayment of a RM500,000 home is RM25,000.

Foreclosure: A foreclosure happens when the bank repossesses your property and attempts to sell it in order to settle the outstanding amount on your home loan. This usually happens when you fail to pay your home loan.

Loan Tenure: This means "period" or "number of years". If a home loan has a "tenure" of 30 years, it usually means it would take 30 years to fully pay off the loan.

Mortgage Reducing Term Assurance (MRTA): This is a type of mortgage insurance. An MRTA provides protection for an outstanding loan amount (usually a home loan), in the event of death or total permanent disability of the person insured. The amount of protection reduces over time, and normally matches the outstanding loan amount.

Prepayment (of house loan): Fully or partially paying off your (home) loan before it is due.

Home Loan FAQs