Which Home Loan to Opt For?

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A HOME buyer with a floating interest rate home loan may feel slightly unnerved in a rising interest rate environment. Just in a span of five months, Bank Negara had raised the overnight policy rate (OPR) by 75 basis points to 2.75% last year and local economists expect the central bank to raise the OPR further in the second half of this year.

As the OPR moves up, banks will also look to increase their base lending rates (BLRs) and a higher BLR will undoubtedly have an impact on a floating rate housing loan. BLR is typically defined as a minimum interest rate charged by banks after considering its cost of funds and other administrative costs.

As most floating rate loans track the BLR, the interest charged will fluctuate based on the rise and fall of the BLR throughout the tenure of the loan while a fixed home loan ensures that the interest charged is fixed throughout the loan's tenure.

For new homeowners, fixed rate loans may be a good alternative provided they are able to lock in when interest rates are still low.

So how do you make a decision on which home loan to opt for, be it fixed or floating?

For individuals currently servicing floating rate housing loans, jumping to fixed home loans immediately may not be the best alternative.

Considerations that one needs to take into account include the cost incurred in refinancing a home loan, as there are fees or penalties impose by the existing financier for exiting your current loan contract.

Also, refinancing will see the individual having to abide by new terms and conditions, which means that the individual's lock in period for the loan may start again. But on the upside, you may receive better prepayment conditions and favourable rates with the new loan.

If a home owner does not foresee a steep rise in interest rates and the variable rate home loan tenure is coming to an end soon, the differential in savings from switching may be small considering that fixed home rates are also inclined to move up in a rising interest rate environment.

“It's important to take note of how many more years you have on your loan tenure. If you have a couple of years left, it may not be worth switching considering the cost of refinancing,” says Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui.

“Also, look at the fixed interest amount as that will help you decide, if it is too high or low. If the fixed rate is at 8% and a floating rate housing loan is BLR minus 2%, then the fixed rate loan is not competitive.”

However, for new homeowners, fixed rate loans may be a good alternative provided they are able to lock in when interest rates are still low.

Ng Wei Kian opted for a fixed rate home loan when he first purchased his home.

“I'm a type A personality and with the worry that interest rates may move up, I'm much more comfortable servicing a fixed rate home loan,” he says.

He adds that since he is an employee with a fixed monthly income, knowing how much he has to pay on a monthly basis provides him with peace of mind, especially since his housing loan is his biggest financial commitment.

“Another plus point is that as you progress in your career and see a higher salary base, your monthly loan repayment becomes smaller in comparison to your earning power,” he says.

While fixed rate loans tend to suit risk-averse individuals, it is best to seek out various options offered by banks and insurers alike in their product offering before one commits to a housing loan with repayments locked in for 30 years.

A quick check on website www.bankinginfo.com.my shows that BLR among banks here range between 6% and 6.30% as of October last year while there are some attractive fixed home loans out there, with one insurer even offering a fixed income rate at 4.85% per annum (non zero moving costs) and 5.25% per annum (zero entry cost) (~ AIA HOME LOANS!!!)

The key take away in making a switch in a housing loan is to examine your financial situation and only change if the penalty fees charged outweigh the savings benefit from the new loan.