In Malaysia today, you can opt to finance your dream home using various methods. Among the methods mentioned were to take a loan from the various banks in Malaysia (both local and foreign banks). I’ll like to take the opportunity today to talk about flexible home loans.

The other day, I was talking to a few fellow bankers to learn about the hype around the new Flexible Home Loans. Apparently most banks in town was putting it on their brochures ranging from MortgagePlus (Hong Leong Bank) to HomeSmart from HSBC (Hong Kong & Shanghai Bank). Have you ever wondered what motivated banks to provide Flexible Home Loans?

Well, apparently back in the old days, when there’s nothing around but conventional home loans, there were quite a number of loan payers who actually had  spare cash lying around. Instead of using the spare cash to make prepayments to their home loan, they pretty much preferred to park their cash in fixed deposit earning measly interest rates.

So here’s the dilemma, on one side they are stuck with conventional home loans charging exorbitant interest rates (5-12%)* and on the other hand they have spare cash parked in Fixed Deposits/ Savings Accounts, earning measly interest rates (1-4%)*. You must be wondering, why don’t they just parked their spare cash in their housing loan account because “A dollar saved, is a dollar earned”

Well, as illogical as it may seem, these groups of people have the mentality that it is much better to have emergency cash in hand than to used up all their savings to offset their conventional home loan quantum. These groups of people feel safer knowing that emergency cash is easily available on rainy days. As such, they do not mind paying the extra interest for their conventional home loans. As the popular saying goes ” A bird in hand is better than two in the bush”.

With the plight of these people in mind, and of course the endless competition among banks to entice more customers, banks started rolling out flexible home loans. (Of course foreign banks took the lead first)

Flexible home loans promises the flexibility for you to deposit and withdraw, any amount, any time and as often as you may need. For example, you may bank in $10,000 into your loan account today and will still be able to withdraw it out the next day without incurring any charges.

Of course, you will still need to pay up your monthly mortgage payments and any additional balance in your loan account thereafter goes towards offsetting your loan quantum and as such your interest payable for that day.

Take this case study for example,

Home Loan Quantum = $100,000 and the Interest rate is 12%** per annum and for this case take customer A who has $20,000 sitting in his fixed deposit.

Case A: Conventional Home Loan 

Under conventional home loan with daily rest interest calculation, Customer A would have to pay a daily interest of

Daily Interest = Remaining Loan Quantum x (Interest rate/365 days) = $100,000 x(12%/365) = $32.88

Total interest accrued at month end = $986

Case B: Flexible Home Loan Concept

Daily Interest = (Remaining Loan Quantum - Amount in Account) x (Interest rate/365 days) =

                    = ($100,000 - $20,000) x(12%/365) = $26.30

Interest accrued at month end = $804

Total Interest Savings = $182

Interest earned if Customer placed $20,000 in Fixed deposit at 4% = $65.75

See the difference. Well that’s the flexibility of Flexible home loans. Basically, you can park all your extra cash into your home loan account and “earn” whatever interest rate that the bank is charging you for your home loan. Furthermore, you still enjoy the flexibility to withdraw your extra cash on rainy days. Now that’s what I call flexbility.

However, do note though that the interest rates for Flexible Home Loans, tend to be slightly higher than conventional home loans. Another thing to note is that not all banks offer the same level of flexibility in their “Flexible Home Loan”. Always shop around for the plan that suits your lifestyle the most.

Disclaimer :

Calculations were made using simple formulaes and may not be accurate. Kindly visit your friendly bankers to obtain a clearer illustration about flexible home loans, as different banks offer different packages and features.

* Interest rate range is based on the interest rate charges for the last 10 years in Malaysia. Interest rate varies with varying BLR.

** 12% per annum interest rate is chosen for ease of illustration. For the current interest rates for Home loans, kindly visit individual bank websites.