Unless you’re really rich, you’re probably going to finance your new home by taking out a loan. Don’t just walk into any bank and take what they’ve got! Not all home loans are made the same, which means that you have the chance to pick one that is more suited to your needs. Without further ado, here are some tips to choose the best type of home loan for you:
Check the Interest Rate
The interest rate imposed on your home loan actually depends on a number of factors such as your credit standing, loan value, loan tenure, and your history with the bank providing your loan. All these factors are still subject to changes in the Base Rate set by Bank Negara. The interest rate you pay may be higher or lower over time whenever Bank Negara adjusts the Overnight Policy Rate, like how it just did this February, but it is also different among the various banks. In general, the lower the interest rate, the better it is for you!
Margin of Financing
Just as how the Base Rate is different for each bank, so is the margin of financing they offer to you. Bank A may give you a better rate than Bank B even when presented with the same details. Basically, the higher your margin of financing, the lower the upfront payment you need to cough up. This is different from your downpayment. Your home loan won’t cover the entirety of your home’s purchase value, so it’s up to you to pay for the rest out of pocket.
Your Future Prospects
Don’t speculate excessively, but you can project your earnings and estimate your budgetary limits for repaying your installments. Your pay should increase every year, especially after you jump to a new workplace. Assuming you don’t face any major milestone or event that requires a significant amount of cash, this should leave you with more and more disposable income every year. If you decide to dedicate that extra amount towards polishing off your home loan early, be careful! Some loans come with a lock-in period, which is a penalty that you will incur if you fully pay off your home loan before the end of your loan tenure. Others may waive that penalty if you inform them in advance. Check the fine print for such details before jumping into this decades-long contract! Alliance Bank and Hong Leong Bank, for example, have lock-in periods between 0-3 years, so it’s possible to have no lock-in period at all.
Flexible or Fixed?
Are you more comfortable with devoting a fixed amount towards installments every month? Or do you prefer paying as much as you can every month so that you can get out of debt faster? If the former, go with a fixed home loan, and if the latter, go with a flexible loan. The flexible loan allows you to deposit extra money into a linked current account with the bank and thus help reduce your principal loan amount, but this comes at a small maintenance fee of around RM10 a month. However, even fixed loans can be repaid above the installment rate that has been set: simply inform the bank in advance,and you’re good to go.