For many of us, buying a property can be a complicated, lengthy, and even daunting, affair. More so, if you are a foreigner or a first-time investor. In reality, the process is rather straightforward provided you play your part and adhere to the guidelines. Our handy property buyer’s flowchart is an excellent tool to help you understand the process and avoid potential loss in time, funds and effort. What do you need to do, when you should do it and whom to seek? Just have a look below:
HOME LOANS & INTEREST RATES
Leveraging on banks or other end financiers is a good strategy for property investing. Rather than dumping a large portion of your hard- earned money or savings, it often makes more financial sense to use OPM (other people’s money) to build your property portfolio.
Using less of your own money allows you to buy more properties and the rental income recouped can be used to generate a positive cashflow (or at least offset the monthly installments). This then allows you to purchase more properties.
Alternatively, if the potential for capital appreciation is high, you can always flip the purchase before the installment payments start to kick in. Here are some tips and ideas on how you can make loans work harder, faster and smarter for you.
What are some of the loans available in the market?
The bank loans in Malaysia are similar to bank loans in any part of the world (that adopts a modern banking system). You apply for a principal amount that is chargeable with a yearly annual interest rate (or profit rate for Islamic financing). Payments are usually to be made monthly (but some loans can be paid weekly as well to reduce interest on the principal amount borrowed) until the full debt of principal and interest is paid off.
During the early years, the large chunk of repayments are used to service the interest, while in the later years, repayments go towards drawing down the principal.
The loans are often unsecured (provided without any need for collateral) as the house itself can be foreclosed if the borrower defaults on his payments. Loans are usually bundled together with the cost of the Mortgage Reducing Term Assurance (MRTA) or Mortgage Level Term Assurance (MLTA), both a form of insurance that is mandatory for home loans. In the event of death or permanent disability of the principal purchaser, the MRTA comes into effect covering the home, relieving the said purchaser of the obligations to service the monthly installments.
While you can choose to get your MRTA from another bank or insurance provider, it is mandatory to have one.
How are interest rates calculated?
Malaysian banks calculate interest rates based on the central bank’s (Bank Negara Malaysia) current Base Lending Rate (BLR). On average, banks charge an interest rate of approximately BLR- 2.4%, with BLR currently being at 6.85%. Hence, the effective interest rate is around 4.45%. Naturally, changes to the BLR will have a difference on bank interest rates. Changes are made with great care and plenty of advance notice by the central bank.
Some may opt for a fixed interest rate to provide for greater insulation from potential fluctuations. Fixed interest rate loans tend to have a slight premium. In return, one gets peace of mind that the monthly installment will remain the same throughout the entire loan tenure.
Usually, shorter loan tenures have higher interest rates, while longer ones (25 years and more) have lower rates.
What about tenures?
Bank loans typically vary from 20 years to 35 years. The younger you are, the better your chances of securing a longer tenure. While a longer term tenure means longer and more repayments, it also means lower repayments on a monthly basis. This can be a great strategy if you are buying a property for rental yield or for the short term, i.e. looking to flip once it is completed.
However, that does not mean you cannot apply for housing loans when you are older. Some banks even have generational loans – loans that can be passed down to the next generation, meaning the liability of servicing the monthly installments will be cascaded to the offspring.
While some may frown on the idea of the liability being pushed to their children, if used carefully, this can be a very effective financial tool, especially when the loan is used to purchase a good investment property that will provide strong capital appreciation and positive cash flow. This way, though the loan is passed down to the offspring, so are the cash flow and the appreciated value of the property.
Another way for an older purchaser to secure a loan is to make a joint application with a younger family member, friend or business partner. In such an arrangement, the bank may be more willing to offer a longer loan tenure.
Should I opt for a conventional or Islamic housing loan?
For the most part, conventional and Islamic financing are similar. Nevertheless, there are some significant differences too. The one point to note is that in a conventional system, there are zero or very minimal penalties for early repayment (provided you repay after the stipulated early repayment period in the loan agreement), while Islamic loans often have a penalty.
The reason for this is the underlying difference between conventional and Islamic loans. A conventional loan is regarded as just that: a loan with an interest rate. Meanwhile an Islamic loan is viewed as a business transaction with a profit rate where the parties have entered into a contract for a guaranteed number of years. The bank operates as an “investor”, investing money rather than loaning money to you, who guarantees to return a profit for a fixed number of years. Early repayment negates this contract and the bank is viewed to have lost its profit, hence the penalty incurred.
However, the penalty amounts are usually negotiable. Some banks have also inserted clauses that if the property is sold after a certain number of years (the bank has had opportunity to make some profit from the loan transaction), it can be sold without penalties incurred.
Read the fine print before signing on the dotted line. Ask your loan officer for more details.
How can I find out how much loan I will need and monthly repayment amounts?
Get an easy calculation with the calculation feature from our website .
How much can I borrow?
If you are a first-time Malaysian homeowner, it is possible to borrow up to 90% margin of financing (MOF). If you are buying your third property, then 70% is the maximum amount under current Malaysian law. However, building societies do not come under the law, which means you can have more than three properties and still get a MOF higher than 70% if you apply with a Building Society. The Malaysia Building Society Berhad is one such entity.
A foreigner can also apply for loans from Malaysian banks. The MOF will differ for foreigners residing in Malaysia (those who have a work permit, MM2H visa, spousal visa, etc.) and those living overseas. Generally, those residing in Malaysia can get MOF between 70% to 90% provided they can show they have the income to service the loan and will be staying in Malaysia for the long term.
For those living abroad, the loan tenure is usually lower ranging from 50% to a maximum of 70%.
Will banks provide loans based on the selling price?
Banks provide loans based on the actual valuation of the property. This means regardless of the MOF, the principal amount is based on the bank’s valuation of the property – the price they believe the property should be. If your price is higher than the bank’s valuation, you may need to source for alternative or additional funding to make up for the shortfall. However, if your selling price is below the bank’s valuation, you should have no problems getting the amount you seek, provided you meet all necessary requirements.