First, let’s understand the principles behind the basic term loan and interest calculations for property loans.
Interest Calculations
The interest calculations for property loans follow that of the reducing balance method. Every time your instalments are paid, a portion of it goes towards servicing the interest, while the remainder goes towards paying down the principal amount owed. When the principal amount owed is higher, a larger portion of the instalment goes towards servicing the interest. This money is what some people call “burnt”.
1. Basic Term Loan (Non-Flexi)
A term loan is a loan with a fixed repayment schedule. Back then, all property loans in Malaysia were basic term loans. It was not easy for a borrower to make additional payments to their loans. They had to write into the bank explicitly to request such an arrangement to be made possible.
Furthermore, any additional money paid to these term loan accounts in most cases couldn’t be easily taken out in the case of an emergency. So borrowers had to be certain before they made any additional payments that it wasn’t money they would need.
There were 2 reasons for such arrangements then:
- Banks were reluctant to let their customers reduce their principal amounts as they pleased because they earned money on interest payments.
- In the past, banking systems and processes weren’t as advanced as they are today.
Now, let’s talk about other types of home loans...
2. Semi-Flexi Loan
Semi-Flexi loans are a natural evolution from the basic term loan. Not too long ago, banks in Malaysia started lowering the barriers for borrowers to make additional payments to reduce the principal amount owed.
Additionally, banks also made it possible for customers to withdraw any additional money paid ahead of schedule to the loan. However, this would incur some processing time, as well as a processing fee usually in the range of RM50 to RM100 per withdrawal from the loan account.
Today, all property Term Loans offered by the major commercial banks are Semi-Flexi by default.
3. Flexi Loan
A fully Flexi loan is one that allows a customer to take out and put in money to the loan account as and when the customer pleases without incurring any additional charges or procedures. This is achieved by linking a Current Account to the loan. Every month, the instalment amount is deducted from the Current Account as scheduled. But, any additional money parked inside the current account will go towards reducing the principal amount owed.
So, if a customer has taken a full Flexi property loan of RM500k with a bank and the customer has RM400k in cash parked inside the linked current account, interest calculations will only be based on the net loan balance, which is RM100k. This saves the borrower RM400k in interest.
However, it should be noted that there are 2 disadvantages to fully Flexi loans:
- Typically, most banks charge a monthly fee for the maintenance of the current account, ranging from RM5 to RM10 a month.
- Between Term Loans and Full-Flexi Loans, some banks offer a better interest rate for a Term Loan.
- Today, not all banks offer Full Flexi property loan options.
But hey, if you’re looking for an option, there’s Bank of China
Yes, Bank of China Malaysia (BOCM) has recently rolled out its Flexi Housing Loan product that combines a Current Account with Home Loan to make it easier for you to plan your repayment. What makes this loan plan great is that it’ll help you to save on interest.
Just as what we’ve explained previously, all you have to do is to deposit more money in your Current Account at any time you wish - it’ll reduce the loan balance and subsequently reduce the loan interest as well. In short, the higher the deposits, the lesser loan interest you’ll have to pay.
And IF you’re worried about the accessibility of that money - DON’T. Because it’ll let you make unlimited withdrawals from your current account whenever you need it. On top of that, you can manage your finances conveniently (deposits, withdraw, transfer, remit or check account status) via ATM, online banking, DuitNow, JomPay and more. This means you can withdraw the money when you need the money urgently or even for your high return investment. It’s hassle-free! Furthermore, BOCM is running a good promotion rate of 3.80% p.a. for the first 2 years, subsequent years is 4.00% p.a.
For more info about BOCM Flexi Housing Loan, call their Sales Team at 03-23878232/03-23878815 or visit any of their branches nationwide!
So, which home loan package should you go for?
We’d advise you to opt for a Flexi Loan package if you have spare cash lying about. By parking the money in your current account, it enables you to significantly save on interest payable.
But, if you’re usually tight on cash or have no intention of putting your money into your loan to reduce the interest payable, then you may be able to get a better interest rate by opting for a Non-Flexi loan.
If you are unsure which to go with, make use of Loanstreet’s Home Loan Comparison to compare the best packages both options have to offer.
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