How To Choose The Right Mortgage & Housing Loan

Buying a house or property is the largest investment for most people. And unless you belong to the super rich category, you will most likely be financing your purchase with a housing loan or mortgage. Taking a housing loan is thus an important life decision. But most of us are not financial savvy enough to choose the right mortgage and loan package that suits ourselves. Many in fact just simply rely on the recommendation by the developer or friends who may not necessarily give them the best advice.

So how do we choose the right loan package? Here are some useful tips for you:

1. Compare the interest rates
This is easier said than done because banks typically packaged the loan differently and they offer different rates for different period of the loan. For example, they may have 3% for the first two years, BLR - 1% for the next three years, then BLR + 0.5% for the subsquent years. So it’s really hard to compare across the different banks. In my opinion, as long as the rates are fairly similar, don’t waste excessive time doing the comparison. What’s more important is to go for a daily calculation, not monthly.

2. Flexibility
Always opt for a flexible loan wherever possible. Some banks offered a combined loan & savings account where all your excess money in your account reduces your loan amount and interest automatically. Some others offer a stand alone loan account where you have to manually deposit extra money in order to lower your loan and interest. Obviously, the former is much more convenient.

3. Promotion Packages
If you are buying from the developer or refinancing an existing loan, do take into consideration the promotions offered. The developer may have tied up with certain banks to offer interest deferrment scheme or stamp duty waiver. And some banks may have attractive package for refinancing like zero moving cost.

4. Early Settlement Penalty
If you are buying a property for short term investment (2 - 3 years) like I normally do, remember to check with your bank the early loan settlement penalty. Banks normally set a minimum period of 5 years from initial or full draw down (to ensure they can make enough money from you) before you can settle your loan completely without any charges. The early settlement is usually set between 3 - 5% of approved loan amount which is rather sizeable. But I have actually come across a bank which just charged a fixed penalty of RM2,000 for early settlement. That’s a huge savings which add to your profit significantly.

5. Margin of Financing
Different banks may adopt different risk and may offer you different margin of financing. Personally, I always go for the maximum margin of financing to gain the best leverage to maximize the rate of return. But then again, if you are a retiree or close to retirement, you may not want to take on so much debt like I do.

Beyond this, the most important thing is to NEGOTIATE! You are the client to the bank and everything is negotiable, from the interest rates (YES), margin of financing to the early settlement penalty. Never ever accept the bank’s offer without negotiating!