Comparing term, semi-flexi and full-flexi property loans. How to choose the best property loan for your property purchase? What other factors should you consider?
An Introduction to Property Loans
Most property buyers will look at financing for their property purchase. Property loans are based on a reducing balance method. Your property loan follows an amortization table whereby every monthly loan payment goes to paying interest while the remainder reduces the principal owed. There are some key differences between basic term, semi-flexi and full-flexi home loans to consider for your property mortgage.
Basic Term Loans
- Fixed repayment schedule.
- Fixed monthly installment throughout loan tenure.
- Requires financier prior approval to make additional payments to reduce your principal owing.
- Flexible repayment schedule
- Monthly installment based on Base Rate (or previously Base Lending Rate)
- Additional amount can be paid to reduce principal owing (either automatically or by specifying principal when making loan payment).
- Depending on financier, may have option to withdraw additional payments made with a fee charged (RM25-100 per withdrawal) and some processing time.
- Similar to above semi-flexi loans.
- A key difference that you can withdraw additional payments made previously out at anytime with no charge to a linked current account.
- Not offered by all financiers.
Islamic vs Conventional Loans
Conventional financing earns profit from the interest charged to the loan borrower. Islamic financing avoids interest (riba) and instead works by buying the property and then selling it back to the borrower at a profit under Bai Bithamin Ajil (BBA).
Islamic Loans Pros
- Capped profit rates for floating profit rates (check for stated ceiling rate with BBA agreement).
- No lock-in period for early settlement of loan.
- Slightly lower late payment fees.
Islamic Loans Cons
- Difficult and more expensive to alter or top-up loan as a new agreement is required replacing the previous one.
- Information and details for early settlement, late payments, etc are more difficult to read and understand with less transparency.
- Higher costs and fees including insurance costs (MRTT vs MRTA) etc.
- Islamic loans have an extra 20% off stamp duty BUT has additional loan documents required thus you end up not saving.
Choosing the Best Home Loan for You
- For most people, a semi-flexi loan gives you the best of flexibility with a small fee for your infrequent withdrawals if necessary. The flexibility is helpful to place additional funds/bonus/etc into to reduce interest and total amount paid especially if it’s your primary residence.
- A term loan can be considered as an option if you can get a good interest rate. Especially if you’re buying a property for rental purpose and if less likely to make principal reduction payments as you focus on rental cashflow.
- A full-flexi loan is useful if you have many large cashflow transactions occurring possibly due to the nature of business you are running. A full-flexi loan may charge you slightly higher interest rates as well.
- Consider how much you can borrow based on net income, current debts, and monthly repayments.
- Consider the amount of financing required: from 100% (first property if qualified), 90% (up to 2 properties), or 70% (3rd property onwards).
- Consider loan repayment period up to typically 35 years or age 70 (whichever shorter).
- Compare different rates offered by different banks & sometimes even different branches.
- Compare whether you will take insurance (MRTA/MTTA) from the financier which may qualify you for slightly better rates.
- Consider the lock-in period whereby you face a penalty if you pay off the home loan early (i.e. Sell to another buyer)
- Consider the convenience and trustworthiness of the financier.
Q: Should I take a home loan where the financier pays for the interest during construction?
While it may look attractive at a glance, often a higher interest rate is charged for you entire loan making it significantly more expensive in the long-term. Run a calculation or work with your PF Advisor.
Q: My financier told me that I can make advance capital payments even with a term loan.
A: Make sure that what is informed is stated clearly in your property financing agreement to make sure that you can make additional payments when you want to which will reduce the principal and interest charged.