Buying a home is a big transaction not everyone can afford to pay by cash. There are many places to borrow money to be able to afford the house of your dream. Just to name a few ideas, you can take a loan from a financial institution, borrow money from family and friends or you can also consider taking up a seller’s loan if your seller is willing to help you finance the property.
The most common way to finance a home is to take up a mortgage loan from reputable financial institutions.
Mortgage loans are divided into three main categories in Malaysia, that is Full-Flexi, Semi-Flexi and Basic Term loans. Depending on the category, borrowers can enjoy a lower interest rate, processing fees and interest charges. Besides, some loans allow for pre-payment and early loan settlement.
If you are thinking that the most important aspect of a mortgage loan is the interest rate, that may not necessarily be the case. In my opinion, the different mortgage loan products are designed for different purchasing needs.
Hence, it is important to understand the different mortgage loan products before deciding which mortgage loan is best suited for your purchasing needs.
What is a Basic Term Loan?
A basic term loan is a mortgage loan that comes with a fixed repayment schedule that is maintained the same throughout the entire loan tenure. With the basic term loan, borrowers are not allowed to make advance loan payments with the intention of reducing the borrowed capital.
To put into perspective, the $500,000 borrowed from the bank using a basic term loan (30-year tenure) will require you to pay $2,000 every single month for the next 30 years.
The total interest charged is calculated at the front using the agreed interest rate. Once the total interest is calculated, it is then distributed throughout the 30 years to finalize the monthly payments.
Important to note, if the Overnight Policy Rate (OPR) changes, the payment schedule is expected to change with it.
Is there any benefit to taking up the Basic Term Loan?
The basic term loan is good for individuals who prefer certainty and do not want to worry about increasing financial commitments. The fixed monthly payment is extremely helpful for homeowners when planning their financial commitment, giving them assurance and peace of mind.
Besides that, borrowers requesting basic term loans typically get to enjoy lower interest rates and annual processing fees in comparison to Semi-Flexi and Full-Flexi loans.
What is the downside to taking up the Basic Term Loan ?
The basic term loan offers no flexibility to offset any borrowed capital with the intention of reducing loan interest. Any pre-payment made for future months will be considered advance payment but will not be used to reduce the overall loan interest.
In the event you wish to pay more, the bank can choose to either reject your pre-payment or to consider the additional sum as an advance payment for the future months. Unlike Semi-Flexi and Full-Flexi loans, this pre-payment will not be used to offset the borrowed capital.
In other words, any pre-payment made for the basic term loan will not result in you paying less loan interest.
On top of that, the additional funds paid to the bank as pre-payment cannot be withdrawn in time of emergency. This is because the pre-payment made previously is already counted as payment for the future months.
What happens if you were to settle the Basic Term Loan earlier?
Any early settlement of the basic term loan within the first 2-5 years from the first drawdown will be charged an approximate 3%. While it is possible to request special considerations, the final penalty is up to the bank’s discretion.
Any early settlement of the basic term loan after the first 5 years from the first drawdown will not be penalized. However, the savings on loan interest will be minimal in comparison to Semi-Flexi and Full-Flexi loans.
What are my thoughts about the Basic Term Loan ?
The basic term loan is an outdated loan with limited benefits, serving a very limited group of people with a very particular need.
In my opinion, the basic term loan can be suitable for homeowners who do not intent to sell their property for the foreseeable 30-40 years. The fixed monthly payment is helpful for them to plan out their financial commitment in the long run to ensure a healthy cash flow every month.
In contrast, the basic term loan is definitely not suitable for property investors looking to invest in a particular location, with the intention of disposing of the property in the foreseeable 5-15 years. The early settlement calculation for the basic term loan comes with an unattractive loan interest savings, easily outshined by the Semi-Flexi and Full-Flexi loans.
Besides that, while the term loan promises a fixed monthly payment, the interest charge is ultimately affected by the Overnight Policy Rate (OPR) determined by Bank Negara Malaysia. If there is an increase in the OPR, the monthly payment will be adjusted by the bank.
In reality, the monthly payment is not so fixed.
What is a Semi-Flexi Loan?
The semi-flexi loan offers some flexibility to borrowers to make advance payments with the intention of paying less loan interest. However, any withdrawal of the additional payment will need to be approved by the bank and the withdrawal process will incur processing charges.
Semi-flexi loan is often the default recommendation from any local banking institution. Compared to the basic term loan, the semi-flexi loan has a built-in facility that allows borrowers to make advance payments without the need of seeking the bank’s approval.
The additional amount paid on top of the normal monthly instalment will automatically be used to reduce the borrowed capital. This will subsequently reduce the amount of loan interest calculated from your mortgage loan.
The only caveat to the semi-flexi loan is when you wish to withdraw the additional payment. You will need to make a withdrawal request with the bank every time you wish to withdraw money from the semi-flexi loan. On top of that, you will be charged a small processing fee for each withdrawal process.
Is there any benefit to taking the Semi-Flexi Loan?
The benefit to taking the semi-flexi loan is the in-built facility that allows borrowers to make advance payments, reducing the borrowed capital. As the borrowed capital is reduced, the calculated loan interest will be lower, saving borrowers money in the long run.
Whenever an advance payment is made on your semi-flexi loan, the bank will automatically use the money to reduce the borrowed capital. With the loan interest being calculated on a daily basis, the now lowered borrowed capital will also reduce your loan interest, saving you money in the long run.
For semi-flexi loans, the advance payment can be withdrawn with prior approval from the banks. The amount of money that can be withdrawn is limited to any additional sums above the agreed payment schedule.
Is there any downside to taking the Semi-Flexi Loan?
The downside to taking a semi-flexi loan is the need to make a request to the bank whenever you wish to withdraw the advance payment. The required paperwork can be time-consuming and a hassle especially for borrowers in need of emergency cash.
On top of the paperwork, you will be charged a processing fee every time you make a request to withdraw the advance payment.
Besides that, the interest rates are typically higher with the semi-flexi loan as compared to the basic term loan.
However, some banks are willing to offer a competitive interest rate for the semi-flexi loan. In some cases, it may be the same interest rate as the basic term loan. Hence, it is a good practice to make multiple applications to a few banking institutions so that you can make an informed decision.
What is a Full-Flexi Loan?
The full-flexi loan may not be as popular as the semi-flexi loan because not all banking institution offers this loan facility. Having said that, I personally prefer the full-flexi loan over a semi-flexi loan.
The full-flexi loan offers better flexibility to borrowers than the semi-flexi loan as it allows withdrawal of advance payments with no need for prior approval, processing fees and penalty fees. Having a linked current account, withdrawal of advance payment is convenient and online.
If you are still unsure what a full-flexi loan is, to put it simply, it has the following characteristics,
- Advance payment can be made without any prior approval from the bank.
- Any advance payment made will be used to reduce the borrowed capital for your mortgage loan.
- Withdrawal of advance payment can be done online using a linked current account or through the issuance of cheque.
- Withdrawal of advance payment does not require any approval from the bank.
Is there any benefit to taking the Full-Flexi Loan?
The main benefit to the full-flexi loan is the flexibility of withdrawing any advance payment made towards the mortgage loan. Full-flexi loan borrowers are typically provided with a chequebook and a linked current account so that money can be withdrawn at any time, with convenience.
This is especially useful for individuals who have the habit of saving while not wanting to put those savings into a fixed deposit. If you are in the position of having a substantial sum available but do not know where to allocate it, the best way is to put it into your full-flexi loan.
When a good investment opportunity or a need for the money do arise, the advance payment can be withdrawn any time without prior approval from the bank.
Compare to other financial instruments, the Flexi-loan can be a good replacement for the fixed deposit.
- Fixed deposit rates are typically on par to mortgage loan
Using the advance payment to offset the borrowed capital on the mortgage loan can yield the same savings in the long run. - Depositing money into fixed deposit comes with a lock-in period
In contrast to the full-flexi loan, you can choose to take out the advance payment at anytime you wish with no paperwork or penalty.
For full-flexi loan, the interest calculation on the outstanding borrowed capital is typically done on a daily basis. With that said, there is no need to plan or align an advance payment or withdrawal to take full advantage of the loan facilities.
Is there any downside to taking the Full-Flexi Loan?
The primary downside to the full-flexi loan is the requirement of having a linked current account. This introduces a fixed monthly fee and other miscellaneous fees related to the current account. These fees are not seen in the basic term and semi-flexi loan.
Besides that, it is commonly known that the interest rates are slightly higher for full-flexi loan in comparison to the semi-flexi loan. However, there are banking institutions that are willing to offer competitive interest rates despite offering a full-flexi loan. Hence, it is best to always apply for a broader number of mortgage loan package before making a final decision.
One thing to note, bankers will offer the semi-flexi loan by default. If you are interested in the full-flexi loan, it is important to express your requirements clearly to the servicing mortgage banker.
What are my thoughts on Semi-Flexi and Full-Flexi loan?
As I have mentioned briefly earlier, full-flexi loan is my personal preference as it gives me full flexibility to adjust my cash flow at any time, at convenience.
Personally, I find it a hassle needing to make official requests to the bank for withdrawing the advance payment. On top of that, you are required to give valid reasoning before the bank will consider your request. If the request does not meet their approving criterion, then you will need to make a new request.
As for the current account and the monthly fees, I believe these are standard practices and costs to having a current account. If you are considering multiple mortgage loans, perhaps it is ideal to have most of them with 1 bank to avoid creating too many current accounts.
Besides, you are also required to pay a processing fee for every withdrawal made. If you are actively taking money out of the semi-flexi loan, you may have incurred higher costs because of the processing fee.
When is the best time to do advance payment on your semi-flexi and full flexi loans?
Something you might not know is that banks typically put a higher weightage on loan interest in your monthly instalment in the first 5 – 8 years of your mortgage loan tenure.
This means for the $2,000 monthly instalment made to the bank, an estimated $1,500 is used to clear off the loan interest while $500 is used to offset the borrowed capital. It may sound like a lopsided deal but it is widely practised in the financial industry for most mortgage loans.
If you are looking to do any advance payment, the best time to allocate more funding into the flexi-loans is in the first 5-8 years of the loan tenure. The additional payment made will be effective in reducing the borrowed capital and the savings on loan interest is significant.
So, what if you only start making advance payments after the first 8 years?
It is still a good practice and you will still save on the loan interest. However, the savings impact is less significant since most of the estimated loan interest has been cleared off in the first 8 years.
If it is still unclear to you, let me attempt to simplify it for you.
Once you sign the loan offer with the bank, the bank has already estimated how much loan interest they will make from this deal. In order to secure their benefit in this transaction, most banks will load the majority of the interest made in the first 8 years of the loan tenure.
Because of this practice, the reduction on borrowed capital is slower in the first 5-8 years as the monthly instalments are allocated for the loan interest, instead of the borrowed capital.
Hence, to save more on loan interest, the best time to make additional payments is in the first 5-8 years. This will significantly reduce the borrowed capital, saving you more money in the long run.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
