How to choose a home loan

Your priority should probably be to go to the bank that offers you the lowest interest rate.

TO the common folk, choosing a home loan is almost as hard as choosing the property itself. If you're currently in the midst of shopping for a home loan to buy your dream house, here are six things you should consider before making what could arguably be the biggest financial decision of your life.

1) Type of home loan

First and foremost, consider what works best for you: a traditional term loan or a flexible home loan (flexi-loan). A traditional term loan requires you to pay a fixed amount each month for the entire tenure of your home loan (eg. 30 years), while a flexi-loan gives you the option of reducing your interest whenever you wish (i.e. by saving your extra money into a linked current account. The more you save, the less interest you pay).

If you have a strict and predictable cash-flow pattern, a traditional term loan may be best. If you prefer flexibility in paying off your loan, a flexi-loan is recommended.

2) Interest rate

As with all loans, your priority should probably be to go to the bank that offers you the lowest interest rate. Let's consider a home loan of RM500,000, over a period of 30 years. The difference in interest payment between an interest rate of 4.2% and 4.15% (i.e. a mere 0.05%) could be well over RM5,000!

3) Margin of financing (how much you can borrow)

Depending on various factors which include the value of the property as well as your standing with the bank, different banks may offer you different margins of financing. As you will be required to pay any amount not covered by the home loan upfront, this becomes very important, especially if you're short on cash.

Let's consider a house that costs RM500,000. You will need to pay RM100,000 upfront if your margin of financing is 80%, but you will only need to pay RM50,000 upfront if your margin of financing is 90%.

4) Lock-in period

Lock-in period is the period you will incur a penalty if you choose to pay off your home loan in full before it reaches the end of its tenure. Usually, the penalty is between 2% and 3% of the principle loan amount. When it comes to choosing a home loan, it pays to have a lock-in period that is as short as possible with a penalty that is as low as possible. Also, some banks do not charge a penalty at all if sufficient notice is given.

5) Fees & charges

A home loan application involves professional and government-regulated processes. This includes preparation and disbursement of loan agreement, payment of stamp duty and processing by the bank, just to name a few. All these processes usually come with fees and charges that will be borne by you, the buyer.

In certain cases, it may also be wholly, or partly ,borne by the banks as part of your loan package. Hence, it is best to sit down with the loan officers (with all the banks you are considering taking your home loan from) and get them to run through with you the fees and charges that will be incurred. The task may be repetitive and time-consuming, but it will be time well spent.

6) The bank

Lastly, understand that you'll be dealing with the bank on a frequent basis for as long as your home loan is in effect (which may be 20 to 30 years). With that in mind, you should probably choose a bank you are comfortable with. Some of the things you may wish to think about include:

Do you have an existing savings or current account with the bank (for ease of inter-account transfer)?

Are you satisfied with their standard of service?

Is a local branch available near your home or office?

Do you consider the bank to be trustworthy and reliable?

Does the bank offer value-added services that will make your life easier for the long haul?

How is the bank's reputation as a whole?

Does the bank provide online banking facilities? This will allow you to pay your instalments easily.

Is your loan officer approachable? Can you call him when you have a question?

Bearing all these in mind, good luck in finding your next home loan.

● This article is provided by www.iMoney.my which compares various loans, savings and insurance schemes available in Malaysia.