With more than a dozen banks in Malaysia all offering housing loan products of some sorts, it is not surprising that many consumers struggle to differentiate between the different types of home loan.
In general, property loans in Malaysia can be categorised into two different groups – conventional and Islamic. Let’s take a quick look at the differences between the two:
Conventional home loanConventional loan accounts for a large majority of the total housing loans in the market. In a conventional housing loan, a borrower agrees to repay the loan amount together with interest over an agreed loan period.
Banks normally charge either a 1) fixed or 2) variable interest rate on conventional loans (or a combination of the two). Most property loans in Malaysia are variable interest rate loans, with the interest rate tied to the base lending rate (BLR) of banks.
Flexi home loan
In an increasingly competitive environment, banks are forced to innovate and expand the types of property financing products being offered. This has brought about the emergence of flexi loan products.
As its name suggests, a flexi loan provides great flexibility to a borrower. A flexi loan is a mortgage product that comes with a linked current account. With a flexi loan, a borrower has the option to withdraw or make extra repayments at any time, without the need to inform the bank beforehand.
Flexi loans are great for those who may have extra cash flow. Each month, the loan instalment is automatically deducted from the linked current account, and the balance will go towards reducing the amount owed on the loan.
Islamic versus conventional home financingIslamic home financing
While Shariah-basedIslamic Home Financing
products on surface have the same characteristics as conventional housing loans, they are based on different concepts and principles.
In a conventional housing loan product, banks earn interest from the borrower. In contrast, Islamic home financing products are not interest-based (hence you will seldom see the word “loan” being used in Islamic products, as “loan” suggests an arrangement which involves an interest payment).
Islamic home financing in Malaysia typically comes in two types – Bai’ Bithaman Ajil (BBA) or Musharakah Mutanaqisah (MM).
Bai’ Bithaman Ajil (BBA) home financing
BBA home financing is based on a buy-and-sell concept. In a BBA home financing, the bank first buys the property at the current market price, and sells it back to the customer at an agreed price. This agreed price includes the actual cost of the property, plus a mark-up for the bank’s profit.
The bank and the customer would then agree to a term and an instalment amount. No interest is charged.
Musharakah Mutanaqisah (MM) home financing
MM home financing is based on a partnership concept. In a MM home financing, the customer and the bank jointly buy and own the property. The bank then leases its share of property to the customer, and in return, the customer promises to buy the bank’s ownership in the property. The customer pays rental to the bank under ijarah, of which a portion of the payment is used to gradually purchase the bank’s share in the property.