Home Loan : Guide to Choosing A Home Loan

To many, being able to afford a new home is indeed exciting but can be stressful. After months of reviewing potential homes, you finally have the financial means to choose the best of the lot. But now comes the mind-boggling task of selecting a suitable home loan.

1. Choosing a suitable home loan
Choosing a home loan for most of us is the beginning of a long-term commitment, one that can stretch up to thirty (30) years! Selecting the right package is important. If this is not planned carefully, you may find your finances strained. So, shop around and know your options before selecting the best package that suits your needs.

2. What are your needs?
Identify and list down your needs and match the benefits offered by each housing loan package. You may want to consider some key points such as: What margin of financing do you need? Any pre-payment fee for early or partial settlement? Does the package subsidize moving costs? Any risks in fluctuations in interest rates? If interest rates fluctuate, will I be in the financial position to take this risk? Any insurance protection required? It is always prudent for the customers to ensure that they know the features of the mortgage when securing the housing loan and ideally the package must be able to meet their needs.

3. Types of housing loan packages
There are basically two types of interest computation for home loan packages in the market:

1. Floating Rate Mortgages whereby interest rates are pegged to the Base Lending Rate (BLR).
2. Fixed Rate Mortgages where interest rates are fixed for the entire loan period.

Floating Rate Mortgages
If the customers opt for the floating rate mortgages, interest rates will fluctuate according to the BLR determined by the Bank from time to time. As such, customers must be prepared for such eventualities if interest rates were to increase during their tenure of the loan. This is because a rise in interest rates could potentially hurt household income, as borrowers will face higher financial obligations if they are not prepared for such risks.

Fixed Rate Mortgages
Nowadays, homeowners have the option of obtaining fixed rate mortgages whereby interest rates are fixed for the entire loan period. AIA offers such a mortgage under its AIA HOME LOAN package. Borrowers under this scheme will be assured that the interest rates and instalments for the loan is fixed for the entire loan regardless of the volatility of market conditions.

The mortgage package protects borrowers from fluctuations in interest rates. This gives peace of mind in ensuring that their finances are intact despite a volatile interest rate environment.

4. Is the interest rate going up or down?
No one can actually predict what the interest rate will be in the next twenty (20) to thirty (30) years. Historically, interest rates for home loans have certainly seen their share of ups and downs over the past years.

Table 1:

Table 1: depicts the analysis of lending rate over the past twenty (20) years. Source BNM statistics.

Based on figures up to February 2007 :

1. Average BLR for twenty seven (27) years : 8.01%
2. Average Lending Rate for twenty seven (27) years : 9.17%

5. What would be the potential impact if BLR increases?

Currently most banks are offering low rates for the first two (2) years and from the third year onwards, it would be based on BLR added to a certain margin. Both BLR and margin is subject to revision at the discretion of the banks.

In Table 2 we have a comparison of the potential impact on total interest payable when BLR increases. For this example, let’s look at Package A – a floating rate mortgage at an interest rate of 1st year: 2.88%, 2nd year: BLR+0.00%, thereafter: BLR+0.25% for a tenure of thirty (30) years.

 Table 2:

In this table, for a loan amount of RM300,000, if BLR were to increase by 1.00% and 2.00%, additional interest to be paid by borrowers would increase by RM67,141 and RM136,912 respectively and loan would be lengthen by approximately four (4) years and seven (7) years respectively (if the instalment remains the same). Of course interest rate fluctuations could also decline but it is important that borrowers must be prepared for any eventualities if interest rates do increase. Unlike the fixed rate mortgages, interest rate is fixed whereby customers need not worry about fluctuations of interest rate for the entire tenure of the loan.

6. Other Features of Mortgages

Is there flexibility in pre-payment?
Pre-payment or putting additional payments to reduce the loan amount, is important to provide more interest savings. For example, if your instalment is RM1,321 for a loan of RM200,000 for twenty five (25) years, by paying an additional RM250 every month, it will shorten the loan tenure by seven and a half (7 1/2) years or save you RM66,408 in interest payments. In AIA HOME LOAN the flexibility of pre-payment includes allowing customers to start paying monthly instalments during the period of progressive release for properties under construction. Customers can start paying instalments instead of just servicing progressive interests for the period of two to three (2-3) years which actually lengthens the loan period by the same period.

Why not unlock the value of your property?
Most of the homeowners can actually unlock the enhanced value of their property for additional cashout. For example if the property purchased five (5) years ago is RM200,000 and the current market value is RM400,000, homeowners can refinance or request for an additional loan to unlock this value by getting additional loan for purposes of children’s education, investment into unit trusts such as Amanah Saham Bumiputera, renovations or other personal commitments and investments.

Insurance coverage for housing loans
As home loans are a big commitment, repaying a home loan can be a major burden if calamity strikes. Fortunately, there are insurance options to protect borrowers against death, permanent disability or even critical illness, where the insurance company will settle the loan and family members need not face the burden of repayment.

There are two (2) different types of policies to choose from – Group Mortgage Reducing Term Assurance (GMRTA) or life policies. GMRTA basically provides coverage on a reducing basis, which will match the outstanding loan. Premiums are paid in one lump sum. Alternatively, borrowers can opt for various types of life policies to secure the loan.

In addition, all properties will also need to be insured with fire / houseowner insurance on the property to ensure that your property is insured against any risks such as fire, air craft disaster, etc.

Can insurance companies provide housing loans to the public?
Under the Insurance Act, all licensed insurance companies are empowered to provide housing loans to the public. The funds from insurance companies are internally generated giving them an additional edge to provide attractive long-term fixed rate housing loans for the benefit of the public.

Concluding pointers
Take your time in choosing a loan package that will best meet your needs. It is important to know, not just the rates, but the features of each package as well. Be aware of the final points of the terms and conditions, as well as the quality of service and time taken for the loan to be disbursed. Always make a comparison of the cost and benefits before making a decision to purchase or refinance. The effort is worthwhile as home loans are a long-term commitment and a wise decision will prove to be profitable in the long run.

What AIA HOME LOAN offers
AIA HOME LOAN is a unique mortgage package to meet customers’ needs as it protects customers from the volatility of interest rates so that borrowers would enjoy peace of mind and easy financial planning due to the fixed instalment amount. It is flexible as the more you pay, the more you will save and you can sell off or pay off at anytime without incurring any penalty.

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Important: This is purely a product summary and shall under no circumstances be used or deemed as an offer to sell nor shall it be taken as a form of professional advice of any manner. Please contact us at 1-300-88 1899 for more information.

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