Home Loans in Malaysia – Types of Home Loans

With more than a dozen banks in Malaysia all offering housing loan products of some sort, it is not surprising that many consumers struggle to differentiate between the different types of home loans.

In general, home loans in Malaysia can be categorised into two different groups – conventional and Islamic. Let’s take a quick look at the difference between the two:

Conventional Home loan

Conventional home loan accounts for a large majority of the total home loans in the market. In a conventional home loan, a borrower agrees to repay the loan amount together with interest over an agreed loan period.

Banks normally charge either a 1) fixed or 2) variable interest rate on conventional home loans (or a combination of the two). Most home loans in Malaysia are variable interest rate loans, with the interest rate tied to the base lending rate (BLR) of banks.

Flexi Home Loan

In an increasingly competitive environment, banks are forced to innovate and expand the types of home loan products being offered. This has brought about the emergence of flexi home loan products.

As its name suggests, a flexi home loan provides great flexibility to a borrower. A flexi home loan is a home loan product that comes with a linked current account. With a flexi home loan, a borrower has the option to withdraw or make extra repayments at any time, without the need to inform the bank beforehand.

Flexi home loans are great for those who may have extra cash flow. Each month, the loan instalment is automatically deducted from the linked current account, and the balance will go towards reducing the amount owed on the home loan.

Islamic vs Conventional Home Loan

Islamic Home Financing

While Shariah-based Islamic Home Financing products on surface have the same characteristics as conventional home loans, they are based on different concepts / principles.

In a conventional housing loan product, banks earn interest from the borrower. In contrast, Islamic home financing products are not interest-based (hence you will seldom see the word “loan” being used in Islamic products, as “loan” suggests an arrangement which involves an interest payment).

Islamic home financing in Malaysia typically comes in two types – Bai’ Bithaman Ajil (BBA) or Musharakah Mutanaqisah (MM).

Bai’ Bithaman Ajil (BBA) Home Financing

BBA home financing is based on a buy-and-sell concept. In a BBA home financing, the bank first buys the property at the current market price, and sells it back to the customer at an agreed price. This agreed price includes the actual cost of the property, plus a mark-up for the bank’s profit.

The bank and the customer would then agree to a term and an instalment amount. No interest is charged.

Musharakah Mutanaqisah (MM) Home Financing

MM home financing is based on a partnership concept. In a MM home financing, the customer and the bank jointly buy and own the property. The bank then leases its share of property to the customer, and in return, the customer promises to buy the bank’s ownership in the property. The customer pays rental to the bank under ijarah, of which a portion of the payment is used to gradually purchase the bank’s share in the property.

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