Buying a house is one of the most significant commitments one can take in life, and taking out a mortgage loan is almost necessary for securing your home.
When you borrow money to buy a house, it’s imperative to understand what you’re signing on for because it’s a 30-plus years commitment. 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.
Take charge of your finances’ well-being by making sound financial decisions when taking up a mortgage. It will help you control 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 do whatever else you want to do.
Check out the following pointers to ensure that you get the best deal for your mortgage loan and avoid unneeded headache.
1. Types of Mortgages
A mortgage is a secured loan used to buy a home or to refinance a home loan. You make regular payments until a mortgage is paid off after a designated number of years. It is usually a loan sanctioned against an immovable asset like commercial property or a house. The lender will keep the asset as collateral until you pay off the total loan amount.
The most common 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 installments for the entire mortgage loan tenure.
For a semi-flexi loan, you can lower the principal debt by paying extra amounts and your monthly instalments, which will help you lower the amount of interest charged. And if you wish to withdraw the additional amount you’ve paid, the bank will charge a processing fee. Meanwhile, a flexi-loan is linked to your current account, where the monthly installment 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, you should 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.
2. Types of Interest Rates
There are two types of interest rates that you can find in a typical 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 allows you to have standardized monthly payments, making long-term budgeting easier and protecting you against the possibility of rising interest rates that could otherwise raise the cost of your loan.
Variable Interest Rate loan adjusts over time in response to changes in the market. The fluctuation is based on Base Lending Rate (BLR) regulated by Bank Negara Malaysia (BNM). It generally offers lower rates compared to a fixed-interest loan. Like most people, you want to get the lowest interest rate for your mortgage loans, as a slight difference in percentage can save you thousands in the long run, leading to a more affordable repayment.
Before deciding on an interest rate, consider your financial circumstance and perform your due diligence accordingly. It would help if you also remembered 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. To simply put, 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 lend to us.
MOF is influenced by various factors, including your credit score, the value of the property, etc. Different financial institutions may offer you different margins of finance. In Malaysia, the maximum MOF for a mortgage loan is 90% of the property’s price while the remaining 10% makes up the minimum down payment.
Here is an example: If your MOF is 80%, to purchase an RM600,000 property, you will need to cough up RM200,000 as a down payment. You will only need to make an RM100,000 down payment if your MOF is 90%.
4. The Lock-In Period
The Lock-In Period is a set period in that you are expected to follow the loan agreement terms. You will incur a penalty 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. 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 you provide them with sufficient notice.
5. Mortgage Closing Costs (Fees and Charges)
Closing costs are myriads fees 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, 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 purchasing a property. Therefore, it is advisable to sit down with the loan officers (the financial institution you consider taking your home loan from) and have them run through the fees with you.
If you still can’t make up your mind or need assistance in which type of property loan to apply for, don’t stress! You can look for help from licensed private money lending companies such as Finsource Credit, providing professional financial advice from its expert loan advisors who are ready to answer your questions 24/7. For more information, call today to learn more about our services.
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