A Comprehensive Guide To The Different Types Of Property Loans

1. Term Loan

Term Loans are one of the most common loans in Malaysia. This loan has a maximum tenure of 35 years, and the instalment and its interest rates are bundled together in the monthly payment.

The fixed monthly repayment on the loan will increase monthly, which will in turn reduce the interest rates. This way, the loan taker will be able to finish paying off their loan in 35 years.

There are no benefits to the loan taker to completing their payment early, and in fact they will be charged a penalty of approximately 3% if they were to settle their payment within the first 3 to 5 years.

2. Overdraft

An Overdraft loan is one of the harder loans to obtain due to its unique nature. Those who obtain this loan will only need to pay the interest rate of the loan, where the amount is deducted from the Current Account.

A benefit of utilising this account is that there is no tenure attached to it, and payees who pay more than the interest rate will lower their principal.

The downside of this loan is that the interest rates are higher than the norm.

3. Semi-Flexi Loan

The semi-flexi loan represents an evolution of the basic term loan, with an option that allows borrowers to make advance payments on their loan amount, without sticking to a rigid and unchanging loan schedule.

A semi-flexi loan allows you to pay off larger sums of your outstanding loan amount – in advance.

That means your total interest is also reduced, since the principal amount on your loan has been paid off, at an earlier point in time.

Borrowers will have to follow the terms and conditions though, in regards to how to go about these extra repayments.

It’ll usually involve emailing or writing to your bank to request permission to pay an additional amount.

With a semi-flexi loan, borrowers can also withdraw additional sums paid over and above the defined payment schedule.

There may be a processing fee for withdrawing this money, and once again, the method of approval may vary from bank to bank.

This flexibility does come with costs, as the interest rate for a semi-flexi loan may potentially be higher than you can find for a basic term loan.

This is in no way guaranteed, and you should always shop around to find the right deal for you. The semi-flexi loan is the default loan type offered by most banks in Malaysia today.

4. Fully-Flexi Loan

The Fully-Flexi (or Flexi loan) in Malaysia offers customers versatility, over and above the semi-Flexi loan products.

It allows borrowers to make additional payments or withdraw excess sums from their current home loan, WITHOUT the elaborate approval procedures!

With this loan product, the home loan itself is tied to the individual’s current account at the bank.

The planned loan installment is automatically taken each month from the current account, as per the pre-approved schedule.

The borrower is then able to deposit or withdraw any additional amount above that value, as long as they make their agreed minimum loan payments.

Let’s say you put additional money into your current account for a couple of months, you’re automatically reducing the interest on your property loan!

If that sounds like the awesome flexibility you’re after, be aware that full-Flexi loans do have their disadvantages.

Firstly, most banks will charge a monthly fee for the maintenance of this current account. That means an additional financial cost beyond just your repayments.

Secondly, in some cases, interest rates for term loans at some banks can be much better than that for full-Flexi loans.

Flexi loans are also not available at every financial institution, making access to this financial product more limited for many.

5. Fixed-Rate Loan

The Fixed Rate Loan is another one of the more common loans in Malaysia. As its name suggests, the interest rates for this package is fixed for its entire tenure.

For those who worry that increasing interest rates and changing Base Lending Rates may affect them, this package is suitable for them.

6. Islamic Loan

Islamic Loans are Syariah law compliant. Using the Murabahah concept, the bank “buys” the property from the borrower and rents it back to them.

Originally, the banks decided their profit rate in advance to determine how much they would earn. But later on, the floating rate was introduced.

This loan is popular with many property buyers, especially short term property investors, as due to the nature of this loan the banks are unable to charge the borrowers a penalty for early redemption.

Borrowers who take this loan for this reason will however need to scrutinise the Letter of Offer from the bank for any Special Clauses before signing, as selected banks have different terms.

Below are some of the more common Islamic Loan concepts.

• Al-Bai’ Bithaman Ajil

One of the earliest Islamic loan concept, this one means “buy and then followed by a sale”.

What happens is that the borrower will sell the property to the bank in cash, whereby the bank will in turn sell the property back to the borrower.

The borrower will then purchase the property from the bank via monthly instalments.

• Al-Ijarah / Ijarah Muntahiyah Bittamlik

This is a loan where by the borrower rents their property from the bank. Ijarah translates to rent, while Al-Ijarah Ijarah Muntahiyah Bittamlik translates to “rent ending with ownership”.

More popularly used to finance vehicles rather than properties, this concept allows the borrower to “rent” the property or vehicle from the bank until they finish paying the total amount and the property or vehicle becomes theirs.

• Musharakah Mutanaqisah

This is one of the more popular Islamic concepts. The buyer and the bank enters into an agreement to buy a property together, and the borrower becomes a tenant to the bank.

The monthly repayment will cover the borrower’s loan and part of the bank’s share. The aim is to eventually finish purchasing the bank’s share of the property.

• Murabahah

One of the more popular Islamic loans in Malaysia, this loan is also known as the commodity housing loan. In this loan, banks are able to offer fixed rates, tiered rates and variable profit rates.

In a convoluted way, the bank pegs the price of an agreed upon commodity with the borrower, and then sells it to the borrower, which the borrower will then use the commodity to pay for their property.

7. Refinancing

Refinancing is popular among property investors and owners who find that the value of their property has appreciated.

A simple explanation of refinancing, is taking another loan for a property that already has a loan taken out on it.

The loan taker will be able to approach the bank to evaluate their property, and if the value of the property has increased, the borrower will be able to take another loan based on the higher value.

This will give them a “cash back” which they will be able to use the monies to invest in other areas.

8. Government Housing Loan

As its name suggests, a Government Housing Loan is a loan for government servants. It is provided under the Bahagian Pinjaman Perumahan.

There are strict rules for government servants who apply for this loan:

• The government servant must be a confirmed employee of the Malaysian government
• They must not be bankrupt
• They must not be a judgement debtor
• They must not be under disciplinary action
• They must have sufficient salary leftover after deduction of the loan
• They are only allowed to take the government housing loan twice
• In lieu of a second property loan, the first must be fully settled first
• If they hold positions in 2 offices, they can only apply for a housing loan from 1 office

Below are the items that the government servants are allowed to finance with their loans:

• Purchase of land
• Purchase of land with house
• House renovation
• Construction of house
• Construction of road leading to house
• Settlement of other debts in order to purchase any of the above