Choosing the right loan
The Star 01/08/2005 By ELAINE BOEY

FOR many of us, the purchase of our house or an investment property is the largest financial commitment that we would ever make and thus the selection of a housing loan is very important.

When choosing between lenders and the myriad of loans available in the market today, it is not enough just to find the mortgage with the lowest interest rate. Other factors must be considered to identify the ''best'' mortgage that fits one’s financial situation now and in the future.

One of the first decisions that borrowers must make is to choose between a fixed rate, where the interest rate remains constant through the life of the mortgage, or an adjustable rate, where the interest rate is adjusted either up or down during the loan tenure.

Adjustable rate mortgages (ARMs) usually have an initial interest rate that is lower than fixed rates but will adjust upwards (unless interest rates really plunge) after the first year.

Some lenders that offer among the most competitve ARMs are Public Bank Bhd, United Overseas Bank (M) Bhd (UOB), American International Assurance Co Ltd (AIA) and Standard Chartered Bank Malaysia Bhd.

The ARM in AIA’s flexi rate package launched last Thursday was defined as the base lending rate (BLR) less 0.38% throughout the entire loan tenure that can be taken up to a maximum of 30 years or till the customer reached the age of 60.

AIA also offers a fixed rate loan at 6.25% every year up to the same maximum tenure, regardless of whatever the BLR may be.

The obvious advantage that a fixed rate mortgage offers is the ability to budget. Borrowers can also take comfort, as the possibility of rising interest rates will not suddenly make mortgage payments unaffordable. However, declining rates do not necessarily mean a corresponding decrease in payments.

Still, the trend in the market today seems to be mortgages with ARM as the current BLR, at 6%, is at its all-time low and lenders can target a broader customer base as less disposable income is required during the honeymoon (the first, second or third) years of the loan.

Customers should pay attention to the interest rates beyond the ‘honeymoon’ years of the loan as the remaining period is of a much longer duration.

UOB's intelligent home loan is an example of a mortgage with low interest rate at the start and a higher rate from the third year up to end of the loan tenure.

Customers that have purchased properties under construction should note that the low interest rate offered for a fixed calendar period usually carries a run-out date.

There is a likelihood that by the time the loan is approved and with the unique system of progressive payments to developers, the amount disbursed by banks during the first few years is minimal.

This means that any savings on interest is much less than it seems. A more ''sincere'' package would offer the special low interest rate during the progressive payment period and continue to run for some time after the loan is fully disbursed.

Customers should also be wary of clauses in the loan agreement that gives the lender absolute rights to alter margin of interest. This, in effect, nullifies the attractive offer of ‘BLR less X% for following years’.

With regards to how long the tenure of the loan should be, the main consideration is whether the purchase of the property is for the person's own occupation or as an investment.

Generally, loans taken for properties to be lived in should be shorter as it represents less of a liability to the borrower in the long run. If the purchase is intended as an investment, i.e. the property will be rented out, the loan can be serviced from received rentals so a long tenure that requires lower monthly payments is more financially attractive.

Some lenders impose exit penalties upon redemption of the loan where conditions and charges of full settlement differ from one institution to another.

Knowing the prepayment penalty ensures that one is not at a disadvantaged position when financially able to redeem the loan.

In its single-tier home loan package, Public Bank does not impose any exit charges but several other institutions specify a ''lock-in period'' of five years. After this lock-in period, customers can fully settle their loan or refinance it with another institution without incurring the exit penalty.

Other factors that need to be explored are additional costs such as technical valuation report of the property, application fees, valuation and legal fees. Some lenders require a mortgage reducing term assurance (MRTA) that settles the loan in the event of death or total permanent disability of the borrower. This once-off payment can be often included in the loan amount but at a higher interest rate.