Home loans: Things to consider

TAKING on a loan to pay for your house is a lot like getting married. Think about it - both involve long term commitment and place certain obligations on you. Wouldn't you want to find out more first before taking the plunge? And for that matter, would you choose whatever comes your way, or take the time to select what is best for you?

So that makes home loans a good type of debt to have. It also provides leverage if your reason for buying real estate is purely for investment.

For example, let's say you bought a RM150,000 house. You pay RM15,000 in cash from your savings and the remainder through a RM135,000 loan. After five years you decide to sell the property because its value has gone up. After paying off the home loan and other fees and charges relating to the sale, let's say you pocket RM30,000 in cash, which is your profit. That's a 100 per cent return on your initial outlay of RM15,000, or 20 per cent on average a year. Because you've been paying down your loan, your effective ownership, or equity in your house increases, which means your share of the profit increases over time. That's the beauty of leveraging.

So, like marriage, there are rewards to be enjoyed, especially if you find the right one for you. But because there are many types of home loans available, how do you find what is best for you? Ask yourself: What do I need in a home loan?

Buying a home involves some costs, such as legal fees, stamp duty and other charges. Typically, you would be paying as much as RM15,000 for these expenses for an average property. You would also incur some legal and processing costs when taking out a loan from the bank. Some home loans do provide financing for certain expenses, which obviously would help you financially. However, this also means that your loan repayment would be more each month.

You may also want flexibility in repaying your loan, such as making bigger payments when you receive your annual bonus so that the loan will be paid off faster. Or being able to make withdrawals should the need arise.

As such, always compare home loans on the features offered to have a better idea of what you will be getting, and whether you need the add-ons. Home loans are generally offered either on fixed or variable interest rates. Under a fixed rate loan, you will not have to worry if interest rates go up. The bad news is that you pay the same installments even if interest rates fall, unlike a variable rate loan. However, for variable rate loans, you may have to pay more if interest rates go up.

Certainly, comparing loans on the interest rate offered is a starting point when shopping for a home loan. You may have come across the term BLR, which stands for base lending rate. The BLR, which may fluctuate over time, is the rate that banks use as a reference when lending. It is the rate the banks give to their best customers. For the rest of us, the banks would offer the loan at a certain margin above their respective BLRs. So if a bank's BLR is 6.5 per cent and it is offering a loan at three per cent plus BLR, what this means is that the interest you would be paying is 9.5 per cent a year.

Some banks are promoting loans at a percentage minus BLR, but usually you get this good rate in the first few months or year, after which you pay a higher rate. This would be useful if you need to free up some money in the first year or so to pay for the new furniture, kitchen extension and the like. But you should have an idea what the rates would be for the remaining tenure of your loan before singing on.

So much for BLR, now let's talk about KLIBOR. There is a new home loan package from Standard Chartered which does not use BLR, but the much lower KLIBOR rate instead as its reference rate. KLIBOR is the interest rate that banks charge each other. Yes, banks borrow money from each other too on a daily basis, which is a normal part of their business. You may have come across the prevailing KLIBOR rate in the business section of the NST. KLIBOR historically has been a few percentage points lower than BLR. As such, KLIBOR-based home loans could potentially cost less.

Doing your research when shopping for a home loan is certainly worth the time and effort.

After all, you're making a financial commitment for the next 20 years or so. If you think there is too much to remember, don't worry. See sidebar for key points to consider when shopping for a home loan.