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Should You Choose the Rent-to-Own Scheme or a Full-Flexi Loan?

Updated 01 Nov 2018 – By Contributor - iProperty


Recently, Pakatan Harapan has promised to increase rent-to-own (RTO) offerings nationwide, in keeping with their vision to make housing more affordable. This will be made possible through cooperation with local banks, covering both primary and secondary markets and involving the low and middle-income earners. It was also in the spotlight last year, being offered to hopeful homebuyers on a small scale.

Another loan type which is already popular among many Malaysians for its repayment terms is the full-flexi loan. Now both are as different as night and day, so how would either one benefit you if you gotta choose one that’s the right fit? If you’re still trying to decide, read on as we shed some light on the differences to help you decide!

 

Rent-to-own Scheme Full-flexi Loan
Potential buyer rents the property first, with the option to buy it later on at a set price. Potential buyer immediately starts paying for the down payment of the property.
Monthly payments as ‘rental’ which is slightly higher than the market rate, but lower than monthly home loan repayments. Monthly payments, but with the flexibility of pumping in more cash at any time to reduce the interest charged.
Good for potential buyer might not have enough cash on hand to pay for the down payment. Good for potential buyer has more spare cash on hand to reduce the loan amount they’ve initially signed up for.

 

What is a rent-to-own scheme?

This is still somewhat a new concept in Malaysia, and it operates based on a ‘lease-purchase contract’ between the potential buyer and developer. By lease-purchase contract, it means that buyers will first rent the home that they are interested in purchasing for a set amount of time, usually 20 – 30 years. There's also an option fee to purchase the property; a typical figure is roughly 5% of the property price.

They’ll then be able to use their right to purchase that property at the end of the contract period. Sounds good right?

But there’s a catch: the monthly rental rate WILL be slightly higher than the current market rate. However, a certain percentage of it will be credited to the future purchase of the property. This way, it’ll slowly reduce the total amount the buyer has to pay when it comes time to purchase the house. Remember: sikit-sikit, lama-lama, jadi bukit!

A few developers in Malaysia have already started offering variants of the RTO scheme in the past, including Ayer Holdings and UEM Sunrise with IOI Properties and Eco World Development joining the bandwagon recently.

DID YOU KNOW: The country’s first bank-initiated RTO scheme is Maybank’s HouzKEY. It was launched for certain primary properties in January 2018, but it has now extended to the residential sub-sale market as well.

 

Who is it for?

The RTO scheme is suitable for first-time homebuyers who don't have enough funds yet to pay for the 10% down payment as well as for those still building their credit score. While on the scheme, the potential buyer has more time to save up and practice good financial habits so that they’ll be ready when it’s time to exercise their right to purchase the property.

It’s also for those who want to test drive a certain property first before purchasing it. This scheme allows them to lock in the price based on the current market value in the event they do decide to purchase it. They won’t be affected by an increase in the property’s price (capital appreciation) over the years.

You see, only by living in the house for a while will they get to:

  1. Learn about any issues with the house and the neighbourhood.
  2. Determine whether the house is a perfect fit for them (and their family).

However, bear in mind that currently this scheme is designed for those in the lower income groups, although the National House Buyers Association (HBA) secretary general is championing for an extension to include the middle income group as well.

 

What is a full-flexi loan?

When you apply for a full-flexi loan package, typically you will open two accounts: a property loan account and a current account. You will need to make sure the current account always has enough money each month, since the instalment is going to be deducted from there to the property loan account. You can read more about it here!

The best feature here: borrowers have the option to reduce the loan amount they’ve initially signed up for. All they need to do is deposit additional sums of money into the current account at any time. This move will not only lessen the interest charged, there’s no need for complicated procedures or additional charges.

For example, say you’ve signed up for a flexi loan with an initial amount of RM400,000. One day, you decide to deposit RM100,000 into the linked current account. Because of that, your loan repayment calculations will be based on the difference between the two amounts, which is RM300,000. Congratulations, you’re now saving a little bit more on interest charges down the road.

You can even withdraw from the additional funds at any time, without the need to make a request with the bank. Every withdrawal is done either via ATM or cheque deposit machine.

However, depending on which bank the full-flexi loan is signed up with, borrowers will be charged a set-up fee of roughly RM200 as well as maintenance fees for the current account (about RM5 – RM10 monthly).

 

Who is it for?

A full-flexi loan is suitable for those who have a decent amount of spare cash and want to save on interest payments. Those who also wish to upgrade to a bigger home in the next 10 years or so after selling off their current property (which means more cold hard cash) will benefit from this product. They’ll pay less in terms of interest compared to those who took a shorter loan tenure.

You gotta face reality though! This type of loan is only suitable for those who have the financial ability and self-discipline to pump in extra cash each month, on top of the minimum repayment amount. This ensures that there’s always a contribution going towards REDUCING (key word here) the interest charged and initial loan amount.

 

Ask yourself if you have the financial capability before you decide

And if you don’t, then you might wanna consider the RTO scheme, seeing as how you can buy more time to save up cash while at the same time, testing to see if the property is exactly what you want. It’s going to be a lifelong (for most people) commitment so you need to be absolutely sure this is the right fit for you and your family to put down roots. So the good thing is that you have the chance to opt out - with some minimal fees - should you suddenly change your mind.

The genuine homebuyers would do their due diligence: finding out what are the pros and cons of both the options on their current finances, as well as checking to see if they’re eligible for a home loan in the first place.

Take the time to weigh your options and make the necessary calculations before choosing what is best for you. You’ll save yourself from a lot of heartache in the long run!

This article was repurposed from "Full-flexi home loan or rent-to-own scheme?", first published on iProperty.com.my

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