Since 1990, the world has gone through at least 15 global economic crises. However, none of them has made an impact as big as the current new normal.
If we were to look at house prices in Malaysia over the last 30 years, a decline can only be seen in 1998 and 1999. However, real estate experts are predicting that local property prices to go down once all the stages of Movement Control Order (MCO) is lifted. Some estimate that the decline can be as much as 10% to 20%.
It is believed that willing sellers and willing buyers, along with aggregate demand and supply, will dictate market movement and property prices. Sellers will need cash to finance themselves or require money to strengthen their cash position thus are willing to drop their price by at least 10%. On the other side of the coin, there are still groups of investors who are on the lookout for a good buy.
However, some have also predicted that property prices will recover during the second month of 2021. With all this in mind, now might be the best time to purchase a home.
The different types of home loans
As a one-stop platform for Islamic financial products, we here at Assidq.com are major proponents of Islamic financing over conventional loans. Our blog is full of articles that explain how the former is better than the latter.
However, in a nutshell, here are the differences between the two:
- Conventional home loan — lenders lend to borrowers to make a profit from the interest charged on the principal amount. Borrowers pay interest on the outstanding principal amount. This can be based on a fixed or floating rate.
- Islamic financing — avoids interest-based transactions (riba). Instead, it introduces the concept of buying something on the borrower’s behalf, and selling it back to the borrower at profit. In place of interest, a profit rate is defined in the contract which can be fixed or based on a floating rate.
Now, both types can be further broken down to the following categories:
- Fixed – Also known as a Term Loan or Basic Term Loan. Comes with a fixed repayment schedule. The monthly instalment you pay is the same throughout your entire loan period.
- Semi- Flexi — Enables borrowers to make advance payments. This is to lower their loan interest without the need to make any formal request to the bank.
- Flexi – Enables borrowers to make advance payments to lower their property loan interest AND withdraw the additional payments they’ve made whenever they like.
There is also the Government Housing Loan for civil servants and some banks even offer renovation loans for the specific purpose of refurbishing a property.
How are home loans affected by the new normal?
With the economic impacts of the new normal, Bank Negara Malaysia (BNM) announced the reduction of the OPR by 50 basis points to 2% on May 5, 2020. It was the third reduction this year and the lowest OPR since 2010.
An OPR (Overnight Policy Rate) is the interest rate at which a bank lends to another bank. It is set by BNM and is an indicator of the health of a country’s overall economy and banking system
A BR (Base Rate) is an interest rate that the bank refers to before it decides on the interest rate to apply to your home loan. It is derived internally within the bank based on how much it will cost the bank to lend you the money. It also takes into account a minimum interest rate set by BNM.
In line with this cut, several banks have announced that their BRs will also be reduced. This is good news if you are looking to buy a home. The results from this OPR and BR reduction are lower mortgage interest rate, and consequently, lower monthly payments.
Approval of a financing application will mainly depend on your Credit Score and Debt Service Ratio (DSR) but as we mentioned earlier, this might be the best time to buy property!