Of all the achievements in life that you’re likely to accomplish, purchasing your very own home is probably one of the most looked forward to. Finally, having a place to call your own, and ticking ‘Buy my dream home’ off your bucket list!
Unfortunately, this is still a faraway dream for many Malaysians, unless one is born with a 24K gold or silver spoon in the mouth. With that in mind, you'll need to apply for a home loan to be able to afford your new property.
The entire process might seem overwhelming at first, but rest assured that once you break it down and understand it better, applying for a home loan and all the "what if's" that follow will seem much simpler.
What Is A Home Loan In Malaysia?
A home loan or mortgage loan in Malaysia is a loan taken out from a bank or financial institution to help you purchase property.
This allows more people to own a home as they don’t need to fork out the entire amount upfront. The down payment of about 10% of the property’s purchase price can be made first, while the owner pays off the remainder in instalments every month.
How Do Home Loans Work In Malaysia?
Home loans in Malaysia use the property in question as collateral. While you would think that the property’s title would fall under your name since you’re the purchaser, that isn’t the case - until you pay off all your monthly repayments in full!
In the meantime, the bank holds the property’s title. That means it’s within their means to repossess the property if worst comes to worst.
Home loans in Malaysia can either come with a fixed or variable interest rate. Scroll down to find out what those mean!
What You Should Know First Before Submitting An Application
Before applying for a home loan from the bank, some of the most important things you should bear in mind, are the interest rates and the type of category you can apply for.
For the former, there are fixed and variable interest rates to consider:
Fixed interest rate refers to a set percentage that doesn’t change throughout the duration of your loan.
Variable interest rate refers to a percentage that's determined by the Base Rate (BR), which we'll discuss further down. Now, whenever the BLR goes up or down, this type of interest rate will follow suit.
Whichever you choose, know that the lower the interest rate, the better for you. A small variation in percentage can mean thousands of Ringgit saved!
How To Calculate Housing Loan Interest In Malaysia?
As you know by now, your monthly repayments goes towards paying off both the principal amount and the interest accrued. Now, how does one go about finding out how much interest is left to be paid?
The “reducing-balance method” is one way to calculate your home loan interest. Simply multiply your outstanding principal loan with your respective interest rate. Read more on how to reduce your housing loan interest here!
Interest after each instalment = Outstanding principal loan x Rate of interest
What Are The Current Housing Loan Interest Rates In Malaysia?
Interest rates for home loans in Malaysia are based on Base Rates (BR), which lay out the minimum interest rate banks give on home loans.
At the time of writing, the average base rates of Malaysian banks are between 1.75% - 2.75% p.a. Our article on housing loan interest rates shows you the latest lending rates of Malaysian banks as well as a list of home loans in Malaysia to get you started!
The housing loan interest rates also differs depending on many factors, including:
The type of home loan (Term, Semi-Flexi, Flexi)
The loan tenure
Margin of finance
The type of property
Your credit score
Which Bank Is The Best For Housing Loans In Malaysia?
If affordability is the only factor in question, then Maybank offers the most competitive home loan interest rates due to their Base Rate being lower than average (1.75% at the time of writing).
The thing is, affordability is never the only factor a homebuyer needs to look at when choosing a home loan. For a more personalised estimate on which home loan is best for you, it's best to use our home loan calculator here!
What Are The Types Of Home Loans Available?
The 3 main home loan categories offered in Malaysia are term, semi-flexi, and flexi loans, with each having a different way of processing the instalments and interests:
Term loans have a fixed repayment schedule, and don't usually allow you to reduce your loan interest with advance payments. And if you want to withdraw from the additional payments you made, you won't be allowed to do so.
Semi-flexi loans allow you to pay extra money whenever you like, to lower the amount of interest charged. You can also request to withdraw from the additional amount you paid, but a processing fee will be charged.
Flexi loans are similar in nature to semi-flexi loans, except that these are linked to your current account, and the instalment amount is automatically deducted every month. If you make any additional payments, you'll be able to withdraw from them whenever you like.
Understanding The Common Loan Terms
There'll be several key loan terms that you’ll encounter in official documents and conversations with your agent, banker, and/or property developer.
These terms might have you shaking your head in confusion – things like the Base Rate (BR) we mentioned above, Deed of Assignment, and valuation, to name some of the important few:
Base Rate (BR): Banks are allowed to determine their own interest rate based on a formula set by Bank Negara Malaysia (BNM), and its increment or decrease affects the interest rates of borrowers directly.
Deed of Assignment: A legal document that acts as proof that the ownership of a property has been transferred from one party to another, and is usually used for a residential property without a title.
Property valuation: The process of estimating the price of your property, carried out by authorised firms or valuation experts, after taking into consideration recent property transaction prices, as well as other market factors.
Fret not! There may be plenty of other terms too, but they can be much easier to understand if you have a reliable property agent on hand as a reference to guide you.
Types Of Property Loans In Malaysia
We mentioned the 3 main home loan categories above, but as a matter of fact, did you know that there are more than that in the market?
For example, refinancing is one form that allows you to take another loan for a property that already has a loan taken out on it. You can actually enjoy a lower interest rate and shortened tenure, if done correctly.
Civil servants, on the other hand, get to enjoy the exclusive perk of being entitled to a Government Housing Loan.
This loan finances the renovation/construction of their home, purchase of land, and even the construction of roads leading to their home!
If you’re beginning a new life with your partner or getting your parents’ help to finance your loan, you can opt for a joint home loan that combines two incomes to get a better shot at increasing the total amount you can ultimately borrow.
However, one thing you MUST always bear in mind when applying for a joint loan is the heartbreaking prospect of the relationship ending on bad terms, which will create a property custody battle.
To protect both parties, it’s best to include the allocations and obligations of each party in the official loan agreement, should a split regrettably happen.
For mortgage loans, the Loan-To-Value (LTV) ratio assesses the lending risks before approving your mortgage. The higher your LTV ratio, the higher the risk is. Hence if you’re approved for a mortgage loan, it’ll cost you more.
The LTV ratio is calculated based on the property’s net price, and not the price stated in the Sales and Purchase Agreement (SPA), as the price in the SPA might include promotions/rebates, which reduces the cost of owning a home.
The LTV ratio for a homeowner’s first property is about 90%, but if it’s your third home, it’s capped at a maximum of 70%.
As versatility in the property market increases, commercial properties can be called home too. Applying for a commercial property loan is similar to applying for a residential one, but you can only get a maximum loan of 85% under your personal name.
The Process of Applying For Your Home Loan
After arming yourself with the basics needed to understand your loan application, now comes the fun part – actually applying for one.
While the required documents are all generally similar, they do differ whether you're an employee, self-employed, running a business, working abroad or a foreigner.
You might also want to consider hiring a mortgage broker, a middle party that’ll GREATLY help you with the paperwork, ease the process of application, and finding the best loan packages, among others.
This isn't to be confused with a mortgage officer from a bank though – a bank’s mortgage officer will offer products from the bank they represent, whereas a mortgage broker is more of a free agent that can offer you a better variety.
What Documents Do I Need To Apply For A Home Loan?
If you're ready to apply for your home loan, you'd need to prepare the required documents, which includes:
Copy of your IC/passport
Bank account and EPF statements
Income tax receipt
Property booking form
How Long Is The Home Loan Application Process?
The home loan application process can be a lengthy one. On average, you can expect it to take anywhere from 2 days up to a week to get a response on whether or not your home loan is approved.
Proper preparation of the documents will take some time, but once you’ve taken care of those, the rest of the process is in the hands of the bank officers. They will request for confirmation of your particulars from mainly three parties:
If the bank is concerned about your ability to repay or another aspect of your application, they may request for additional documents which will further delay the process.
If your application gets rejected, it will be delayed even further as you’ll have to wait 3 - 6 months before submitting another application. So when it comes to home loans, try to get it done right the first time!
Our guide to the basics of applying for a home loan will take you step-by-step through the entire process, so no need to fret.
What Can I Expect To Happen Next?
It’ll take the bank 1-2 days to process your loan after checking with the relevant authorities like CCRIS and CTOS. If your application is delayed, it might be because the loan repayment is too high for you to afford.
As such, you'll need to present alternate sources for income like a Unit Trust Fund or Fixed Deposit account, to avoid the loan application from being canceled. If that’s not enough, a Guarantor might be needed.
Alternatively, your loan application might have been rejected instead. To avoid this from happening, make sure you understand the entire process, carry out proper research before deciding on a property, and never be afraid to ask for help!
Even if you’re still feeling uncertain about your loan and will do anything necessary to get it approved, you can actually increase your chances simply keeping on top of your debts, paying bills on time, and even having a good employment record.
It helps to calculate your Debt Service Ratio (DSR) too, so you know just how much of a loan you’re eligible for, based on your monthly commitments. Up to 40% of loans are rejected because of a bad DSR, so it’s no small matter!
Once you've selected the bank which offers the best interest rate, you should receive your Letter of Offer. This document lays out the buyer's interest to purchase the property, and almost always includes a form of payment to lock it down.
Why Did My Home Loan Get Rejected?
If you went through all the trouble only to get your home loan application rejected - don’t get your hopes dashed!
By the end of 2020, home loan rejection rates in Malaysia stood at 28%, according to data by Bank Negara Malaysia.
As home loan rejection is a big issue that haunts many homebuyers, we’ve covered a lot on it in the past - from the Top 10 Reasons Your Loan Application Was Rejected, right up to Bank Loan Execs Share Why Home Loan Applications Are Rejected.
Below are a few of the most common reasons for home loan rejection in Malaysia:
Unfavourable credit score.
Not submitting the “right” documents.
Flaws in the documents prepared.
Different banks have different policies, you may get accepted at one but rejected at the next.
Wouldn’t it be great if you could find out whether or not your application will be rejected or approved, before even stepping into the bank?
Our PropertyGuru Loan Pre-Approval solution gives you an indication if you might get approved, effectively speeding up your application process. Try it out for yourself to see!
How Can I Pay Off Everything As Quickly As Possible?
Everyone wants to move the troublesome things out of the way, what more worrisome home loans that’ll shadow you for the next 30-plus years of your life?
"So, can I pay more than the monthly instalment to reduce my principal loan amount?"
Yes, you can - and you’re encouraged to if it’s within your means. To get your home loans done and dusted as soon as possible, you can settle it a lot more quickly by reducing the interest of your housing loan.
How this works is that when you pay the monthly instalments, part of it goes to the interest, and the rest goes towards the loan amount owed (the principal).
Simply put: The higher the loan amount owed, the higher the interest that you have to pay. Hence, if you want to lower your interest rate, you’ll need to lower the owed loan amount.
How you can do so is by making more frequent payments or in bigger amounts, which will help to gradually reduce the loan amount owed.
Homesharing doesn’t need to be for the whole unit; it can be for just a room where users (travellers) are free to use shared common areas like the kitchen, living room, and dining room.
So if you’ve just bought a new property and have a spare room not in use yet, make it comfy and homely enough that you can rent it out for short-term stays that’ll help you reduce your debt!
What Happens If I Am Not Able To Repay My Home Loan?
Circumstances change, and we’re bound to hit potholes from time to time. Perhaps you were retrenched, or stumbled upon other financial troubles.
If you find yourself unable to meet your monthly repayments on time, the first step is to approach your lender to explain the predicament you’re in.
The lender will work together with you to modify the loan in a way where you will be able to pay off your loan. This might mean lowering the minimum monthly repayment or a temporary deferment.
You might be tempted to ignore all your responsibilities...but surely you don’t need us to tell you that it will only invite more trouble. Neglecting your loan entirely will lead you towards the path of bankruptcy or foreclosure.
Can I Refinance My Home Loan?
Yes, refinancing your home loan is a completely viable option - and can be a very logical one too.
Many people look to refinancing when they’ve found themselves in a tough spot financially. But there are many reasons why homeowners choose to refinance.
Sometimes, it’s to have extra cash on hand to finance a new business venture. Other times, it may be to settle debts incurred elsewhere that have higher interest rates (such as credit card bills) and prevent them from compounding further.
The end goal for refinancing is typically to lower your home loan interest rates or extend the tenure. To learn more on refinancing your home loan, our Ultimate Guide to Refinancing is just what you need!
What Is A Lock-In Period?
A lock-in period is a period of time in which you’ll have to pay a penalty if you want to end your home loan earlier than agreed.
The lock-in period is usually between 2 - 5 years, starting from the day the bank issues the first loan payment on the loan agreement. Penalty fees can vary, but are typically between 2% and 5% of the outstanding loan amount.
Be Vigilant When Applying For Home Loans
Applying for home loans can become stressful and confusing, but always exercise caution when doing so, especially when you’re dealing with third parties like bankers, mortgage brokers, agents, etc.
Home loan scams are aplenty and at times, they’ll promise you things that they’ll claim “No other individual/bank can provide.” Be mindful and remember these tips to determine if it’s a scam or not:
Home loans are only approved in person, never through calls, texts, or social media.
You must sign the offer letter and loan agreement; the bank will not approve it otherwise.
Banks require collateral (a form of security) to protect themselves should you be unable to pay back your loan.
Make sure the individual and company you’re dealing with are from reputable, trustworthy backgrounds that are well-established and known (in a good way, of course!).
If you’re having difficulties with your loan, consult an agent or bank personnel that can guide you in the right direction.