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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 mortgage..
A home loan, also known as a mortgage, is the sum of money given to you by a financial institution to buy a property. In exchange for this sum of money, the financial institution will have security in the form of their legal entitlement to keep your property’s deed until your home loan has been paid bank in full.
If you already have an existing housing loan in Malaysia and want to change to another product or lender without moving home, it is known as a ‘refinancing’.
Principal – The total amount you are borrowing from your bank.
Interest – The charges from the bank to you. You will be paying back your loan amount to the lender plus the rate of interest given by the bank.
Fees – The charges from the bank to cover things such as servicing the home loan.
Term – The length of time you must repay your loan amount plus interest to the bank.
Repayments – The amount you pay to the bank to cover your home loan.
Collateral – The bank is entitled to hold your property’s deed as a form of security in case you are not able to repay your home loan.
These are the types of home loans available:
Term Loan – This home loan allows you to have a maximum loan tenure of 35 years. If you pay off your home loan earlier within the first 3 to 5 years, you will be charged a penalty fee of approximately 3%.
Fixed Rate Loan – The interest for this home loan will be charged a fixed rate throughout the loan tenure. If you don’t want to worry about whether the interest rate will increase or decrease, this would be a suitable type of home loan to apply for.
Overdraft Loan – This loan requires you to only pay for the interest rate of the loan and the amount will be deducted directly from your current account. There is no loan tenure. However, the interest rate you are required to pay is higher than usual.
Flexi Loan – This loan is a combination of a term loan and an overdraft loan. You can get a lower interest rate when you put in more money in your current account. For more information about the flexi loan, click here.
Al-Bai’ Bithaman Ajil – An Islamic home loan which follows a buy-and-sell concept. The bank will buy the property for you at the current market price. Then, they will sell it back to you at an agreed price where you will have to pay in monthly instalments.
Musharakah Mutanaqisah – An Islamic home loan where you and the bank enter into an agreement to buy a property. You will become a tenant to the bank and your monthly repayments will cover your loan and part of the bank’s share of the property.
A lock-in period is the length of time where you will incur a penalty from the bank if you choose to do a full settlement of your home loan. For example, if your lock-in period in your home loan contract is 5 years but you have decided to pay your home loan in full before the 5 years, the bank can impose a penalty of 2% to 3% of the total loan amount.
Therefore, when you apply for a home loan, be sure to pay attention to the lock-in period because you might have to incur extra costs for an early settlement.
BR in Malaysia is a reference interest rate used by banks to decide how much to charge for various products they offer. In Malaysia, home loans are normally quoted as a percentage above or below the BR. This means, if the BR increases or decreases by a certain amount, the interest rates charged on floating rate loans also increase or decrease by the same amount.
What is Down payment?
An upfront payment made by the buyer of a house or car (or other highly priced goods/services). Down payments are typically expressed as a percentage of the full purchase price. For example, a 10% down payment of a RM500,000 home is RM50,000.
What is Foreclosure?
A foreclosure happens when the bank repossesses your property and attempts to sell it in order to settle the outstanding amount on your loan. This usually happens when you consistently fail to pay your loan instalments.
What is Loan Tenure?
This means “period” or “number of years”. If a mortgage has a “tenure” of 30 years, it usually means it would take 30 years to fully pay off the loan.
What is 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.
What is Prepayment (of house loan)?
Fully or partially paying
What is 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 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:
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 mortgage.
Some common fees and charges you would expect to incur include:
The banks presented in the comparison table offer both Islamic and conventional loans. Islamic loans are Shariah compliant. Instead of borrowing and lending, Islamic finance relies on sharing the ownership of the assets and therefore risk and profit/loss.
You might choose to refinance your current mortgage in case another bank offers a lower mortgage interest rate. In order to do it, please submit your application for the bank loan that you would like to take and our mortgage consultants will contact you and explain you the details.
These are the criteria to apply for a home loan:
However, some banks requirements may differ from the above. For the minimum annual income, it depends on the bank and which financing scheme you are applying for. Make sure to check with your respective bank on their requirements.
On Loanstreet, just press apply and fill in your details. We will give you a call or send you an email within 1 working day, depending on your application. After that, we will submit your application to the respective bank. However, if your application does not meet our criteria, we will send you an email stating that you may have to walk into the bank to apply for the home loan.
For Employee:
For Self-Employed:
That being said, some banks may require you to provide more documents. Make sure to check what documents are required by your respective bank.
Once you have submitted the necessary documents required by your bank, it will take up to approximately 7 working days to approve your application and disburse the loan to you. This process depends on the loan amount, loan tenure and your eligibility. Make sure to submit all the relevant documents with the correct details to help speed up the application process.
You can make additional payments if your bank allows you to do so. Before making any additional payments, make sure to check whether there is an early settlement fee and whether it is worth it. Besides that, you should also consider recalculating the monthly instalments with your bank if you were to make additional payments because sometimes making additional payments will not reduce your monthly instalments.
When you are not able to repay your home loan, your bank will have to seize your assets and you may be evicted from your home. However, your bank will send reminders on your missed payments. If you know you aren’t able to make your monthly repayments, go to your bank and discuss on what other alternatives they can provide you.
There could be several reasons why your home loan got rejected. To check all the reasons, click here.
You can definitely refinance your home loan, just click here.
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