Purchasing a house is one of the biggest commitments one can take in life and taking out a mortgage loan is almost indispensable in securing your house.
So, it’s extremely important to understand what you’re signing on for when you borrow money to buy a house because if you make a poor financial decision upfront, you’ll end up struggling — and it can compound and become a bigger problem throughout the life of the loan. Don’t put yourself at a disadvantage as it will unravel all the hard work you put into other areas of your financial life.
Take charge of your finances’ well-being by making sound financial decisions when taking up a mortgage. It will help you to be in control of your expenses as you will know how much you’re spending each month on your house and have money set aside to pay your mortgage, save, invest, or whatever else you want to do.
Check out these few tips to ensure that you make the best out of your mortgage loan.
1.Types of Mortgages
A mortgage is a type of secured loan used to buy a home or to refinance a home loan. You make regular payments on a mortgage until it’s paid off after a set number of years. It is usually a loan sanctioned against an immovable asset like a commercial property or a house. The lender will keep the asset as a collateral until you paid off the total loan amount.
The most common types of mortgages available in Malaysia are Traditional Term Loan, Semi Flexi-Loan, and Flexi-Loan. A traditional term loan usually carries fixed interest rates. It requires you to repay over time in scheduled instalments for the entire tenure of the mortgage loan.
For a semi-flexi loan, you can lower the principal debt by paying extra amounts in addition to your monthly instalments which will help you to lower the amount of interest charged. And if you wish to withdraw the additional amount you’ve paid, a processing fee will be charged by the bank. Meanwhile, a flexi-loan is linked to your current account where the monthly instalment is automatically deducted. It allows you to reduce your mortgage loan’s interest whenever you wish, for example, if you put the extra money into your linked account, you can pay lesser interest.
If you have a predictable monthly cash-flow pattern, it’s advisable for you to apply for a traditional term loan. However, if you work in an industry where you can generate extra cash from commissions frequently and prefer flexibility in paying off your loan, a semi flexi-loan or a flexi-loan is the way to go.
Understanding the concept of interest rates, types of rates and how they work are some of the most fundamental knowledge when it comes to applying for a mortgage loan. Like majority of the people, you want to get the lowest interest rate for your mortgage loans as a small difference in percentage can save you thousands of Ringgits in the long run, leading to a more affordable repayment.
There are two categories of interest rates that you can find in a mortgage loan package – Fixed Interest Rate and Variable Interest Rate. A fixed interest rate loan maintains the same interest rate for the entirety of the loan tenure regardless of the market’s fluctuations. One of the most popular fixed-rate loans is the 30-year fixed-rate mortgage, it enables you to have standardized monthly payments, making long term budgeting easier and protecting you against the possibility of rising interest rates that could otherwise increase the cost of your loan.
The interest rate of a variable interest rate loan adjusts over time in response to changes in the market. The fluctuation is base on Base Lending Rate (BLR) which is regulated by Bank Negara Malaysia (BNM). It generally offers lower rates compared to a fixed interest loan.
Consider your personal financial situation and perform your due diligence by browsing through different financial institutions to determine which type of interest rate is bets for you. You should also remember that interest rate is only one part of the total cost of a loan. Other factors like term tenure, lender fees and servicing costs will also contribute to the overall expense.
3.How Much You Can Actually Borrow (Margin of Finance)
Don’t be intimidated by the jargon. In simple terms, the Margin of Finance (MOF) is the percentage of the amount we wish to borrow from the financial institution or how much the financial institution would actually lend to us.
MOF is influenced by various factors which include your credit score, the value of the property and etc. Different financial institutions may offer you different margins of finance. In Malaysia, the maximum MOF for a mortgage loan is 90% of the price of the property while the remaining 10% makes up the minimum down payment.
Here is an example: If your MOF is 80%, to purchase a RM600,000 property, you will need to cough up RM200,000 as a down payment, you will only need to make a RM100,000 down payment if your MOF is 90%.
4.The Lock-In Period
The Lock-In Period is a set period of time that you are expected to follow the terms of the loan agreement. You will incur a penalty typically range between 2% to 5% of the principal loan amount if you decide to pay off your mortgage loan earlier than agreed.
The lock-in period is usually between 2 – 5 years and with the case in Malaysia, it is better to have the lock-in period as short as possible while minimizing the penalty fees. However, some financial institutions will forfeit the penalty fees if sufficient notice is given.
5.Mortgage Closing Costs (Fees and Charges)
Closing costs are myriads fees and charges for the services and expenses required to finalize a mortgage. A mortgage loan application involves many third parties as well professional and government-regulated processes such as preparation and disbursement of the loan agreement, stamp duty payment and processing, just to name a few. Most of the closing costs will be borne by you, the buyer, but the seller typically has to bear for a few costs too.
Understanding what closing costs cover and budgeting for them will smooth out the final stretch of the process of purchasing a property hence, is it advisable to sit down with the loan officers (the financial institution you are considering taking your home loan from) and have them run through the fees and charges with you.
Want to know if you’re financially eligible for a mortgage loan? Talk to our advisor to find out more.
Avex Credit is a licensed money lender in Malaysia under the purview of Ministry of Housing and Local Government, and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.