Questions you simply MUST ask when signing up for your first mortgage

To the common Malaysian, there is probably nothing more intimidating that signing up for a home loan to buy a house for the first time.  Not only are you making a financial decision that would affect a good part of your working life; you’ll also need to deal with bank letters of offer that resemble anthologies of alien text, as well as loan officers spewing words like “lock-in period” and “variable rate” with seemingly no intention other than to confuse you.

Unfortunately, being the generally trusting populace that Malaysians are renowned to be, many first-time home buyers end up signing on the dotted line without fully understanding the terms of their home loans.  This could boil down to many reasons: not wanting to look bad in front of the loan officer, literally being pestered into signing, or in some cases, simply being too busy (or lazy?) to read the terms and conditions.

For first time home buyers who find bank terms and conditions too hard to comprehend, here is a list of questions you should clarify with your loan officer before you sign that letter of offer.  Remember: when it comes to home loans, it’s better to be safe than sorry.  What you ask now could potentially save you tons of heartache and regrets many years down the road!

(NOTE: The following list is meant as a guide for first-time home buyers only. We apologise if this is too basic for seasoned home investors.)

Question 1: What kind of home loan is this?

Let’s start off with an easy one.  First, find out if the loan offered is a Term Loan or a Flexi Loan.  To put it in the simplest terms possible: a Term Loan is a standard home loan account, while a Flexi Loan is linked to a current account.  For Flexi Loans, you can deposit extra money into the linked current account to reduce your principle loan amount, or withdraw the extra money you’ve deposited as you see fit.  However, there is usually a fee of RM10 per month to maintain the said current account.

Question 2: What is the interest rate? Is this the best you can offer?

As with any matter that involves borrowing money, you’ll want to keep the loan interest as low as possible.  Based on the experiences of many home buyers in Malaysia, it is a common tendency for loan officers to tell you that “all loan rates are the same”.  However, something as small as a 0.05% difference could yield thousands of Ringgits in savings, so it would be in your best interest to get the best rate!

You can see the various rates available on iMoney's online home loan comparison table, for example.

You can actually apply for a multiple number of home loans, say three, as long as you don't sign on the letters of offer.

When the letters of offer arrive, use them as bargaining chips to negotiate for better rates with all the banks you’re interested to sign up with.

Question 3: Is the interest rate fixed or variable?

In Malaysia, most home loans are calculated based on Base Lending Rate (BLR), which is regulated by Bank Negara Malaysia.  Say the current BLR is 6.6% p.a. and the bank offers you -2.4% p.a., it means your home loan is charged at an interest of 6.6% - 2.4% = 4.2%p.a..  You pay more interest if BLR goes up, and less interest when BLR goes down.  This form of calculation is commonly known as a Variable Rate.

On the other hand, some banks may offer you a Fixed Rate, which remains unchanged throughout the loan period. Say you’re offered a fixed rate of 4.2% p.a. in your letter of offer; you’d basically be paying the same 4.2% for the rest of your loan period, no matter how the BLR changes.

As a home buyer, there is really no “golden formula” to determine the better option though many believe that interest rates as a whole are about to increase. So if you get a low fixed rate, it might be good to lock in your home loan at this rate.

Question 4: Would I be penalized for settling the loan early?

Somewhere along the line, you might wish to refinance your home loan, shorten your loan period, or pay it off entirely.  Either way, this requires you to cancel your loan agreement before the loan period in the form of early settlement.

If this happens during the "lock-in period", you have to pay a penalty. In Malaysia, the “lock-in period” is usually three to five years, although some loans don't have lock-in periods at all! Penalty charges can range from 2% to 3% of the full loan amount. If your loan package indicates an overly lengthy lock-in period or outrageous penalty charges, you’re better off looking at other banks' offerings.

Also, take note that some banks start counting the lock-in period from full release of your loan, whilst others do so from the first draw down (i.e. the first time the bank releases a payment to the seller).  Make it a point to go with the latter.

Question 5: Can I pay more than the monthly instalment to reduce my principle loan amount?

Nowadays, banks generally do allow you to make extra payment to reduce your principle loan amount.  For a Flexi Loan, you can do so by depositing your extra funds into a linked current account.  For a conventional Term Loan, you may need to inform the bank a month or a few months in advance.  Whatever it is, make sure this is clearly stated in your letter of offer.

Question 6: Who is paying the loan legal charges?

In Malaysia, taking a home loan involves legal and stamp duty charges that generally include: loan agreement fees (1% for first RM150,000; 0.7% of remaining value of loan under RM1 million), stamp duty (0.5% of loan amount), legal disbursement charges and government tax on legal fees.  For a home loan of moderate value, this easily comes to a few thousand Ringgit.

A tip to those of you who want to avoid paying such legal costs: look for home loan packages that come with "zero moving costs" (which basically means that the bank absorbs part or all of the aforementioned costs and charges).  However, banks generally do so in return for less-competitive interest rate on your home loan.  So, make sure you do the math before you commit.

And there you go!  By asking the questions above, you should be able to ascertain some of the most important terms on your home loan.  As you become a more seasoned home buyer, you may also start asking more complex question such as redraw and overdraft facilities.  But in the meantime, Happy home hunting!