Types of Home Financing products

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There are many types of different home financing packages in Malaysia. Before you decide on the best package that suits YOUR needs, you must understand the basic differences, as well as its advantages / disadvantages of the various products available in the market.

Only by understanding the features of the various options available will you be able to “strategise” the usage of the facilities granted.

The common types of financing are:

  • Fixed rate for the first few years, with floating rate for the remaining tenure

E.g. 1st 3 years 5.50% p.a. and thereafter BLR + 0.25% p.a. This is the most popular type of financing in the market, offering RIDICULOUSLY low financing rate such as 0.00% for 1st year! However, the feature of these packages may be limited, as they are considered basic products by the bank.

  • Fixed rate financing throughout the whole tenure.

E.g. 1st 3 years 5.50% p.a. and thereafter 7.50% p.a. These packages are commonly offered by Islamic Banking financial institutions, or Building Societies (such as MBSB) and some Insurance companies (such as AIA). This product is also popular among Muslim customers as well as customers seeking “peace of mind” in their financing package. As the rates are fixed and not BLR-linked, you will be able to calculate the EXACT commitment for the financing.

  • Floating rate throughout the whole tenure.

E.g. 1st year BLR -1.00% p.a., 2nd year BLR – 0.50% p.a. and thereafter BLR + 0.15% p.a. Not as popular nowadays as many banks offers a combination of fixed and floating rates.

  • Floating rates with reducing rate trend.

E.g. 1st year BLR – 0.10% p.a., 2nd year BLR + 0.00% p.a., 3rth to 5th year BLR + 0.20% p.a. and thereafter BLR -0.15% p.a. This latest trend in the market is designed to encourage customer loyalty. As many customers opts to re-finance their accounts after 5 years (usually called the lock-in period), such packages offer LOWER “thereafter” rates to coax customers to stay with the bank LONGER!

As the above deals mainly with variations in RATE structures, there are also variations in the FEATURES of the packages which may affect the overall pricing / package attractiveness.

  1. Overdraft-linked floating rate financing : Such products work similar to an overdraft account, with maximum limit assigned to you. Any amount paid into this account reduces principal, which is used to calculate the following month’s interest. In theory, the more you deposit, the more you save by paying lesser interest, while enjoying the withdrawal flexibility it offers. All you need to ensure is that the monthly interest is paid, while the principal amount already paid can be re-drawn for other uses, as long as it is within the assigned limit. Think of it as a credit card on your housing loan! The facility may be evergreen (not paid down!) and usually priced at a premium or at overdraft rates e.g. 1st year 5.50% p.a. and thereafter BLR + 1.00% p.a.!!
  2. Free-moving / Zero-Entry cost packages : This can be in any of the above financing structures but with slightly expensive pricing, usually for the first 3 to 4 years. The accumulated price differential between a normal and a free-moving cost package is about 1.80% to 2.40%, which the bank will use to “off-set” the lawyer-costs and stamp-duties. For example, a normal package may be priced at BLR + 0.15% for 3 years, while a Free-moving cost package may be priced at BLR + 0.80% p.a.
  3. Home financing with Re-Draw facilities : This can be offered in any of the above financing structure except for the overdraf-linked facility, which is essentially a RE-DRAW product! The re-draw feature is now a regular feature of most home loan products, WITHOUT additional premium charged on the pricing. The facility allows you to re-draw any pre-paid PRINCIPAL in the account in multiples of RM1,000, usually at a nominal fee. The re-draw feecan range from a flat fee of RM50-00 or a certain percentage for each re-draw. Some banks limit the re-draw frequency to 2 or 3 re-draws per year. The facility is USEFUL to meet emergency cash requirements should the need arise.

It is also important to note that most packages with features (1), you may not be able to deposit your EPF withdrawals (from Account 2) as EPF requires your loan to be a straightforward Home Loan (monthly instalments) for them to release the funds.

With a package with feature (3), the EPF funds paid into the account may not be considered as principal payment that is eligible for re-draw. Ask your banker, or check your letter of offer.

Attractive offers from various banks may sometime confuse you when finding the right financing package, but is essential to focus on what your needs will be in the future. If you tend to make regular lump-sum payments, a facility with more flexibility will be most useful, although some may be more expensive. If you are inclined to make regular monthly instalments instead, a straight-forward home financing package may be better value-for-money for you.

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3 Comments (+add yours?)

  1. angelique1224
    Aug 01, 2008 @ 12:13:46

    I agree. It is very important that you first look on these things before actually buying or applying for a home loan. You must know your financial capabilities and I advise you to read some Tips for the first time home buyers.

    Reply

  2. Andrew
    Mar 02, 2009 @ 09:40:27

    how can I be sure that any excess payment (pre-payment) i make goes towards the reduction of principal and subsequently reduction of interest, and NOT to some other ‘excess’ account that is available for redraw only but does not affect interest calculation?

    would appreciate some help here… Thanks!

    Reply

    • Amir
      Apr 11, 2009 @ 22:21:42

      It all depends from bank to bank. The system of each bank is set up differently, but most will cater for excesses. However, some banks will only put the excess into principal if it is above the minimum amount for example capital repayment minimum amount must be RM1,000 or more. Anything below RM1,000 it may be treated as an advance payment. So check with your bank on how they treat advance payment. Usually they don’t pay off other “outstanding items” such as insurance due or legal fees unless its the bank’s policy or their instructions to do so, so please check with them.

      Reply

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