Factors behind Home Loans Interest Rates

Factors behind Home Loans Interest Rates

As most housing loans in Malaysia come with interest rates, it’s not a surprise that people will generally want to borrow a loan with the best interest rates as possible.

interest-rate-factorsFor those of you who don’t know what interest rates are, it’s a nominal fee that the bank charges to the loan that you borrow. Each bank charges different interest rates and these rates usually depend on the amount of money you borrow and also what type of loan you’re borrowing.

However, there are generally few factors behind the interest rates that a bank charges.

a) Base Lending Rate (BLR)
What is a Base Lending Rate (BLR)? It’s a minimum interest rate in which the bank refer to whenever they are deciding the amount of interest to charge for. BLR is usually calculated based on a formula that takes the organisations’ cost of funds, other administrative costs and such into considerations.

Although BLR is usually adjusted by banks, it is Bank Negara that decides on the rate.The housing loan interest rates in Malaysia are usually quoted as either one percentage above or below the Base Lending Rate (BLR).

b) Fixed rates vs Variable rates
Mortgage loans in Malaysia typically charges either the fixed rates or the variable rates. Fixed rates is when the interest rates of your loan remains the same throughout the whole loan period regardless of market conditions. The Variable/Floating rates meanwhile is the exact opposite as it will increase or decrease depending on the current market condition.

c) Method of calculation
The two types of method used in calculating the interest rates are the Reducing Balance Method and the Flat Interest Rate Method. The former is where the interest rates charged are according to your remaining loan balance while the latter’s interest rate is fixed throughout the entire loan period.

d) Daily Rest vs Monthly Rest
Another factor that may concern the interest rates charges is whether the bank calculate according to the Daily Rest or Monthly Rest basis. The Daily Rest is where your loan interest will be calculated based on the previous day’s outstanding balance. While, for monthly rest you will be paying the interest rates according to your previous month’s outstanding balance.

Conclusion

As a conclusion, only commit yourself to a loan after you’ve familiarise yourself with it. Make sure you know what interest rates are being charged, how much you’re being charged etc as sometimes interest rates can be more burdensome than the loan itself.

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