If you have been planning to buy a property or a home, you would be now be considering the best loan to suit your needs. It is always fun to find the home that you desire but it is in deciding how to finance it that will determine how you will live your life for the next 20 to 30 years.
Common methods to owning a home
Getting a home loan would probably be the best option and banks would be more than happy to provide you with one. It is not common for Malaysians to buy a home with cash as it would have several implications, among them raising the flag with income tax (that would be another topic altogether). So, if you are planning to apply for a home loan, there would be several factors that you should consider.
The conventional bank loans
To begin with, there are a few major types of home loans offered by banks and financial institutions. As a consumer, you must be aware and know what each of them entails as it would affect how you would pay back later.
The conventional bank loan is the most common and popular in the market. Basically, it is where the bank pays the amount of the home to the seller and then lends an amount plus interest to you. You then pay back the loan amount of the period agreed. They would normally charge you either a fixed or variable interest rate. In Malaysia, the latter is mostly practiced. Within this, there are 3 different types
- Term Loan – This type of loan involved fixed monthly installments. It is very much like a personal loan where the interest rate is predetermined and agreed and you pay a fixed amount for the duration of the loan.
- Semi-Flexi – A semi-Flexi loan is one that is like a term loan but you get some flexibility to try and reduce the interest rate like paying more in advance to shorten the term thereby reducing the amount (both principal and interest).
- Flexi – this type of home loan is linked to the current account of the loan holder and the amount will be deducted each month.
- Refinancing – This is like getting a new home loan to cover the outstanding amount of your current home loan where you can actually free up some cash. However, it means your repayment term could be prolonged.
Islamic home financing
Based on the Syariah principles, this is not based on the concept of interest. Islamic home financing operates similarly and there are 2 main types namely MM or Musharakah Mutanaqisah and BBA or Bai’Bithaman Ajil.
- Bai’ Bithaman Ajil (BBA) – This home financing option is designed based on buy-and-sell. The bank buys the property and then sells it to you at a higher (and agreed) price. No interest will be calculated here and you will both agree on the repayment schedule and the amount payable.
- Musharakah Mutanaqisah (MM) – This home financing option is not a buy-and-sell concept but works on a partnership model. The bank will buy the property with you and you will agree to buy the ‘shares’ from the bank. While you are doing this, you are actually paying ‘rental which accumulatively will be paying back the bank’s share of the property. Like the earlier concept, no interest rate is imposed here, just a higher amount.