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Making Sense about Home Loans – Interest Rate

Many questions is asked about home loans during loan enquiries with loan agents, casual conversations with friends, local forum posts, etc….

The questions asked are generally the same ones I ask myself during my search for a home loan
that offer the best deal.

It’s like shopping for vegetable groceries, trying to find the best deal in town ….
Carrefour, Jusco, Tesco or Local wet market?
Hmmm…. where do I buy the freshest and cheapest “Siew Pak Choy”? Organic or non-organic?

Siew Pak Choy

Of course, home loans can be a little bit more complicated… throwing you jargons like flexi-loan,
OD facility, MRTA, lock-in period, ceiling rate, BLR, BFR, Islamic & non-Islamic (when did loans became religion related?) etc… and the list goes on…..

Scenario
Hence, as I begin purchasing my first property… I decided to understand the world of home loans and dive into the various jargons that’s thrown to me…. To boldly go where several have gone before….
So, with my calculator and the internet as my guide… I journey into this world….
to seek new life styles and new civilization…… (ok, enough with this star trek crap..)

Solution
The first most obvious question I ask (like most do) is…
What’s the interest rate?

I found out it’s usually a “BLR +/- a percentage figure”. Like BLR – 1.5%
BLR means Base Lending Rate… but what’s more important is the rate itself.
As of this writing… Bank Negara BLR guideline is 5.55%.
Meaning given the example above,
The interest rate is 5.55% – 1.5% which equals to 4.05%.
So, in “simple” calculation if I borrow RM 100,000 I will be paying RM 4050 interest per year.

Loan Amount 150k

Also, the higher the loan amount the cheaper the rates.
So banks will usually breakdown it down like…
If loan <= RM 150,000 then BLR – 1.5%.
If loan > RM 150,000 but <= RM 1 million then BLR – 2.0%

Tier Interest Rate

An then… to make things more complicated, interest rate are often
offered thru a tier system like,
1st year = BLR – 2.5%
2nd – 5th year = BLR – 2%
5th – 15th year = BLR – 1.8%
Thereafter = BLR = 1.5%
I usually opt for the simple 1 tier or at most 2 tier rate system…
else I will choose the lowest interest rate within 5 year period
due to the average lock-in periods (more on that next time)

BLR BFR KLIBOR

Probable most people assume that BLR is the same across banks.
My-self included. Well… it’s not.
Most banks follow the standard BLR guideline but not all.
Example (as of this writing),
Citibank BLR is 5.6%, Affin bank is 5.50%, most other banks is 5.55%.
Hence, I do make sure to confirm the BLR rate instead of assuming it follows the standard.

Floating Rate Index

While some home loans do not use BLR as their floating rate,
but instead uses BFR (Base Financing Rate) which most Islamic Home Loan uses.
To my knowledge both rates are usually the same.
One advantage is that it’s usually cap at a certain ceiling rate.
Meaning the rate won’t go higher then… say 8%.

And then there are those who are more imaginative…
Standard Chartered offers a Home Loan which uses the KLIBOR rate.
KLIBOR rate is usually lower like 2.5% but the catch is that
the other interest rate charge is higher.
So, it would be like 2.5% + 1.0% which ended up pretty much the same
for rates using BLR or BFR.
KLIBOR is also said to be more volatile… meaning the rate changes more often.

Total Interest Rate

After finding out all the above…I start adding up the numbers
and find the “best deal” in terms of interest rates.

Anway… if there’s going to be more floating rates introduce in the future
and things start getting even more complicated….
Maybe next time I will just opt for a Fixed-Rate Loan

Analyze Interest Flow

July 25th, 2009 | 1,962 comments

1,962 comments to Making Sense about Home Loans – Interest Rate

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