A Mortgage Makes Home Ownership Affordable
The different mortgage options available to home owners
A mortgage is a debt instrument offered by banks or financial institutions in Malaysia to assist home buyers seeking funds to purchase real estates. Upon the approval of the mortgage application, the bank becomes a Chargee (in the case of individual title property) or an Assignee (in the case of master title property), as in the property is charged / assigned to the bank. This allows the bank to secure its interest by ensuring monthly repayment by the borrower; in the case of default, the bank may apply to the Court to auction the property in order to recover the loan.
According to Dato’ Teh Tai Yong from Teh Kim Teh, Salina & Co. Advocates & Solicitors, there are few types of property loans available to homeowners in Malaysia as shared by him below.
STANDARD HOME LOAN
Standard Home Loan is the most common mortgage option provided by various banks in Malaysia. The bank finances the borrower’s purchase of property, and in return the borrower repays the bank by instalment together with the interest within the stipulated tenure. Interest rate for a loan can be fixed or variable. Fixed interest rate is where the interest rate is maintained at the same rate without adjustment to the future fluctuation, whereas variable interest rate fluctuates depending on bank’s Base Rate (BR).
The CEO and Founder of GM Training Academy PLT, Miichael Yeoh says that banks usually offer this type of loan under Islamic loans, while some conventional insurance companies may even offer a similar facility at a lower interest rate.
Although the interest rate tends to be higher than conventional loans, the benefit of fixed interest rate is that the borrower can plan out their future payments and cash flow, and do not have to worry about escalating interest rates. On the other hand, variable interest rate allows the borrower to pay instalment according to the current interest rate which may fluctuate according to BR.
FLEXI HOME LOAN
Flexi Home Loan is a term loan that comes with the convenience of overdraft. While the borrowers need to pay the minimum monthly instalment, they may also make payments in advance. And the good news is, the portion of the amount paid in advance can be withdrawn from this flexi account in time of need.
As the amount paid in advance will be consider a part of settlement for the principal, interest will not be charged against the portion of loan already repaid in advance, hence they will be able to save on the interest every time they deposit more than stipulated into this account. However once withdrawn, the interest will be charged again. It uses current account to allow the borrowers to use facilities such as ATM, cheques and also online banking service for their transactions. It can be a good option as it saves a lot of interest if used to your advantage.
ISLAMIC HOME LOAN
Islamic Home Loan prohibits charging of interest, Hence, it applies the concept of “buy and sell” and / or “lease”, instead of charging interest rate in the mortgage loan. For example, one of the commonly used Islamic loan product is Musharakah Mutanaqisah (Diminishing Partnership).
A Musharakah Mutanaqisah Agreement establishes a partnership where the customer and bank jointly buy and own the property, and the bank leases the property to the customer where the customer promises to buy the bank’s ownership of the property in future by paying rental under Ijarah Agreement (Instalment Leasing Contract) on monthly basis to the bank. In other words, the customer pays rental until full settlement, upon which they will own the property.
WHAT ABOUT REVERSE MORTGAGE?
While not available in Malaysia yet, Reverse Mortgage has always been available in countries such as Australia, Canada and the United States of America. It is a financial agreement that allows owners, normally a senior citizen that own properties, to cash out on their equity.
Under such an agreement, the borrower may choose to receive either monthly or lump sum payments from the bank, which will help the cash flow management needs of the owners. The loan balance will increase as time goes, until the ownership of the property is transfer back to the bank upon the owner’s demise.
So should the government implement reverse mortgage? In any sophisticated capital market, it may be feasible for a product like this to be introduced, says Mark Chua, bestselling author of the book “Who Says” and Managing Director of the 92Five Group, However, he emphasises that regulation and eligibility requirements must be carefully defined, so that there will not be any abuse or financial irresponsibility.
For example, if lump sum payments occur – what will happen if the owners misspend it all? Should we put a cap on lump sum payments? Should we only mandate monthly payments so that the risk of financial mismanagement is lower?
Simply put, reverse mortgage might not be suitable for everyone. It will be more beneficial for retirees who only have a roof over their head and do not mind selling their residence to the bank for a sum, which will support their expenses for the rest of their life. This sounds like a better option for them as they are too senior to apply for other mortgages, example the refinancing of their home, and they can also retire with a peace of mind with the payments that they are getting from the bank.
The only thing that they must be aware of is that their dependents such as spouse and children certainly have to be financially independent since they will not be able to inherit the property.
To sum it up, borrowers these days are spoilt for choice when it comes to selecting the available loan packages, but then again it will all depend on what is your main objective when it comes to choosing the best package.
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