Residential Property Loans in Malaysia: The Good, The Bad and The Fugly

Buying a house is one of the most significant investments anyone can make in their lifetime. With the high property prices in Malaysia, most people require a residential property loan to finance their purchase. However, finding the right loan can be a daunting task, with so many options available. In this article, we’ll examine the types of loans available for residential properties, historical interest rate data, and why the loan environment is set to get Fugly or much worse in the future.

Types of Loans Available

In Malaysia, term loans, semi-flexi loans, and full-flexi loans are different types of financing options that are available to individuals and businesses. Each type of loan has its own features and benefits, and it is important to understand the differences between them to make an informed decision when choosing a loan.

1. Term loans: Term loans are a type of loan where the borrower receives a lump sum of money that is repaid over a fixed period of time with interest. The interest rate is usually fixed for the entire duration of the loan, and the borrower is required to make regular repayments, usually monthly, until the loan is fully repaid. Term loans are ideal for businesses that need a specific amount of financing for a specific purpose, such as purchasing equipment or expanding their operations.
2. Semi-flexi loans: Semi-flexi loans are a type of loan that allows the borrower to make additional repayments to reduce the principal amount of the loan. This can help the borrower save on interest charges and pay off the loan faster. However, the borrower cannot withdraw any excess payments made. The interest rate for semi-flexi loans is usually variable, meaning that it can change based on market conditions. Semi-flexi loans are a good option for borrowers who want some flexibility in their loan repayments, but still want the security of a fixed repayment schedule.
3. Full-flexi loans: Full-flexi loans are a type of loan that offers the most flexibility to borrowers. With a full-flexi loan, the borrower can make additional repayments, withdraw excess payments made, and even reduce the loan tenure without any penalty. The interest rate for full-flexi loans is also usually variable. Full-flexi loans are ideal for borrowers who want complete control over their loan repayments and want the ability to make extra payments whenever they can.

Who are these different types of Residential Property Loans in Malaysia for?

1. Term loans:

• A property investor who needs to purchase a new property for their portfolio
• A homeowner who wants to renovate their property and needs a lump sum of money to pay for the renovations
• Someone who is buying their first home and needs a loan to finance the purchase

2. Semi-flexi loans:

• A homeowner who wants the flexibility to make larger loan payments when they can to pay off their loan faster without penalty
• A property investor who wants to reduce their overall interest charges by making additional loan payments
• Someone who has an irregular income and wants the flexibility to make larger loan payments during high-earning months and smaller payments during low-earning months

3. Full-flexi loans:

• A homeowner who wants complete control over their loan repayments and wants to be able to make extra payments whenever they can
• A property investor who wants to withdraw any excess payments made to their loan
• A self-employed individual or freelancer who has an irregular income and wants the flexibility to pay more on their loan during high-earning months and less during low-earning months.

It’s important to consider your individual financial situation and goals when choosing a property loan type. Each type of loan has its own benefits and drawbacks, and what works best for one person may not work as well for another.

Historical Data on Interest Rates

Historically, Malaysia’s interest rates have been relatively stable, with occasional fluctuations. The base rate, which is used by banks to calculate interest rates, stood at 3.25% in 2016. In 2018, it was raised to 3.5%, and in 2019, it was lowered to 3%. However, in 2021, due to the COVID-19 pandemic, the Overnight Policy Rate (OPR) was reduced to a record low of 1.75%.

Things have seemingly gone south since then however.

The rumbling crescendo of post-pandemic OPR hikes began on:
11 May 2022 with the first 0.25% increase which was followed by,
6 July 2022 – +0.25%
8 Sep 2022 – +0.25%
3 Nov 2022 – +0.25%

Bringing the entire hike to a total hike of 1%.

Might not seem like much but let me share why compounding though it is the magic of growth can also be a dark magic of decline.

Calculating loan repayments can seem complicated, but it’s actually a fairly straightforward process. Let’s take the example of a RM450,000 property loan in Malaysia to see how a 1% increase in OPR would affect the monthly repayments.

Seeing as how, as of February 2023, the OPR rate in Malaysia is 2.75%. If we take the example of a RM450,000 property loan and calculate how a 1% increase in OPR would affect the monthly repayments, here’s what we would find:

At the current OPR rate of 2.75%, the interest rate on a typical term loan would be around 5.15% per annum. Using this interest rate, the monthly repayments on a RM450,000 loan over a 30-year term would be approximately RM2,464.

If we compare this to pre-post-pandemic OPR hikes:
The monthly repayments based on the loan amount, interest rate, and loan tenure. For a loan amount of RM450,000 and a loan tenure of 30 years (360 months), the monthly repayment amount would be approximately RM2,186. A difference of RM278 per month.

The GOOD thing for now is that this is still relatively manageable whereas interest rates and repayments are concerned when compared to other property lending markets in the region. Also, historically, interest rates are still close to the lowest they’ve ever been. Lest we not forget that it was within most of our lifetimes that mortgage interest rates were double digits!

Why the Loan Environment is Going to Get Fugly

If the OPR rate were to increase by another 1%, the interest rate on the loan would also increase by 1%, to around 6.15% per annum. Using the new interest rate, the monthly repayments on the same loan would increase to approximately RM2,718. This is an increase of around RM254 per month, or around RM3,048 per year.

But what if the borrower had taken advantage of the 6-month moratorium on loan repayments offered by banks during the COVID-19 pandemic? In that case, the increase in monthly repayments would be even more significant. During the 6-month period, interest would have continued to accrue on the loan, but the borrower would not have been required to make any payments. This means that the outstanding balance of the loan would have increased, and the borrower would be paying interest on a higher amount.

Assuming the same loan of RM450,000 with a 30-year term and an interest rate of 5.15% per annum, the monthly repayment during the moratorium period would have been zero. However, at the end of the moratorium, the outstanding balance of the loan would have increased to around RM456,000. Using the new interest rate of 6.15% per annum, the monthly repayment on the loan would then be around RM2,997. This is an increase of around RM533 per month, or around RM6,396 per year, compared to the pre-moratorium payment of RM2,464 per month.

In conclusion, a 1% increase in OPR may not seem like a significant amount, but it can have a significant impact on monthly loan repayments, and the impact is even more pronounced if the borrower has taken a repayment moratorium. It’s important for borrowers to carefully consider the impact of potential interest rate changes when taking out a loan and to ensure that they are financially prepared for any changes that may occur in the future.

FAQs

Q: Is it better to take out a term loan or an Islamic loan?
A: It depends on your preference and beliefs. Term loans charge interest, while Islamic loans apply a profit rate. Both have their advantages and disadvantages.

Q: How can I find the right loan for my needs?
A: Do your research and compare loans from different banks. Look at the interest rates, repayment terms, and other fees.

Q: Will my interest rate go up if the OPR increases?
A: Yes, if the OPR increases, your interest rate will likely go up as well.

Conclusion

In conclusion, residential property loans in Malaysia are a complex and ever-changing landscape. With two main types of loans available, historical interest rate data, and potential OPR increases, it’s crucial to do your research and find the right loan for your needs. As interest rates are set to rise, the loan environment is set to get Fugly. Therefore, it’s important to consider the long-term impact of taking out a loan and plan accordingly.