How does the interest rate of your housing loan works?

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To help you own a property, banks offer housing (property or real estate) loans. Generally, property loans are unsecured loans that are offered by banks or financial institutions where the title will be transferred to you once you have finished servicing the loan.

Long term commitment

Unlike personal loans or hire purchase, a property loan is usually very long. It can range from 10 to 30 years depending on your eligibility. Every instalment paid will decrease the principal amount borrowed as well as the accrued interest involved.

What are the types of interest rates for properties?

There are 2 types of interest rates applied to properties namely fixed-rate and adjustable rate respectively. Fixed-rate property loans are very straightforward where you will be subjected to a single and pre-agreed interest rate throughout the term of the loan. If the loan is for 30 years, the same interest rate will be applied throughout. On the other hand, the adjustable interest rate is as the name implies, changes according to the market conditions of a certain time.

Not the same as other loans

Take note that the calculation of interest for properties are slightly different than the other types of loans. This is because it has what is known as the Reducing Balance Rate or Diminishing Balance Rate. In simple terms, this means that the amount you pay in instalments will change throughout the duration of the loan.

What does this mean then?

In housing loans, the interest is only charged on the balance in the principal amount. This is because as you repay more, the amount reduces accordingly which means, you will pay lesser every month.

Calculating the interest rate

Housing loans in Malaysia use the BLR or Base Lending Rate as provided by Bank Negara Malaysia. Before your loan is approved, you will need to provide a downpayment (of at least 10% of the property’s amount). Then, it will be applied to the interest. For example, if the property is RM500,000 and you provide a 10% downpayment (RM50,000), then you will be applying for a loan of RM450,000.

If the BLR is 5% then it is added to the principal interest offered by the bank. In this case, let’s say the principal interest is 0.5%, then the interest rate would be 5% + 0.5% = 5.5%.
In this case, 5.5% is applied to the initial amount you are borrowing, which is RM450,000. As you repay more in the next few years, the interest changes. The BLR could be at 4% after 5 years and the amount you own has reduced which means the instalment you are paying could reduce significantly as well.

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