June 25, 2013

What is a housing loan and how many types of housing loans are there?

I am writing a new book. It is about Housing Loan and of course, in continuation of my Ask The Lawyer series, I have titled the book '40 Questions You Should Ask Your Lawyer Before Taking A Housing Loan in Malaysia'. I want to be as concise as possible so there will not be 40 More Questions You Should Ask Your Lawyer Before Taking A Housing Loan in Malaysia.

My two books tackled issues about buying residential property from housing developer and is skewed towards buying these residential property in cash. Why? Because I opined you need to understand the basic before involving purchasing property using a housing loan. A housing loan needs it's own book to be understood. Now that I have columns in New Straits Times' Real Estate and Decor and also in thestarproperty.my with occasional articles in various other publications, I will complement my published books and to-be published books with articles in them. 

As always, I use this blog to gauge responses from my readers or would-be readers. If you still have not got my book from bookstores like MPH, Times or Kinokuniya, you can order online through my publisher Book Planet. The link for my books is here : Ask the Lawyer series in Book Planet

While waiting for my book to finish, go through this first chapter. Consider it like reading an excerpt of the whole book as this first question is the whole template for the whole book. Comments and complains are welcome, as usual :

Question 1 

Housing loan is a financial instrument borne out of a need of the consumers, who are house buyers seeking to buy houses. In this day and age, everyone has some form of debts or another. Borrowing money has become a norm and it is recognised by financial institutions around the world as the best way to check the financial credibility of a potential customer. In short, the more debts you have with one financial institution, the potential for you to get any type of loan from another financial institution is higher. Of course, as a borrower, you must make sure you are capable to manage all the loans you have taken from all the financial institutions you have taken loans from before you are given another loan by another financial institution. One of the biggest amounts of money by borrowing one will take in his or her lifetime is the housing loan. House, even the smallest one, is expensive. The need for a house has never diminished as people need somewhere to live whether they can afford it or not. Hence, housing loan is needed to help people to buy a house according to their need and for those who buy house as investment, as one way to finance the investment.
   In the whole scheme of property purchase, there can only be two types of house buyers. There are those who buy a house to stay in it and those who buy a house as a form of investment. All the housing loans in Malaysia are tailored for those who buy houses in order to stay in it and not for those who buy a house for investment. With the current property climate in Malaysia where government has to intervene in order to fulfill the supply of affordable houses to the masses, I don’t think we will ever see financial institutions coming up with housing loans for the investors. That is why all borrowers of housing loans are asked to sign a letter of undertaking (which will be explained in this book) affirming that they will be living in the house they bought and taken a housing loan for. In order to answer the question “What is a housing loan?” the answer is - any type of loan taken from a licensed financial institution in Malaysia to finance the purchase of a residential property in Malaysia. In order to explain the concept of housing loan further is to dissect each type of the housing loan available and to see the mechanics of each type of housing loan. As questions relating to housing loan are answered one by one in this book, the enigma surrounding housing loan is unraveled one by one.
   There are so many types of housing loan available to finance the purchase of any type of property in Malaysia. These housing loans relate to all types of properties available for sale from either housing developers or individuals. There are so many ways to divide housing loans into basic categories. Types of properties are divided into property issued with title and property without title or property to be subdivided later. Housing loans available to finance the purchase these properties can be divided into the same category too. The documentations for housing loan given by financial institution for residential property with title is very much different from documentations for housing loan given by financial institution for residential property to be subdivided later. The difference between these documentations will determine the process and the cost to prepare the documentation for the housing loan. The documentation for the housing loan to finance purchase of property with title is more straightforward than the documentation for housing loan to finance property to be subdivided later. The nature of residential property to be subdivided later requires another round of documentations to be executed when the property is finally issued with a title.
   However, the more popular way to divide the types of housing loan on offer by financial institution is whether a housing loan is a conventional loan or an Islamic loan. As financial institutions streamlined the operation of their conventional banking and Islamic banking, when a bank officer attend to a customer’s enquiry about housing loans, the first question the loan officer will ask is whether the customer is applying for a conventional housing loan or an Islamic housing loan. Both housing loans are different from each other and the documentations for both types of housing loans are very much different. Both conventional housing loan and Islamic housing loan are different products. The terms used to explain how the conventional housing loan and Islamic housing loan is given and disbursed are different among financial institutions. Conventional banking term such as ‘interest’ is substituted with ‘profit’ when being referred in Islamic banking. This is just one of the terms which differ between a conventional housing loan and Islamic housing loan. An explanation on the difference in either the concept or the documentations of an Islamic housing loan can be found within this book.
   There is no right way to list the types of housing loans. Like all loan products offered by financial institutions, when you want to take a housing loan, the important question is to ask yourself why you are taking the loan. It is understandable if the housing loan is to finance the purchase of your dream home. If you have saved to pay the deposit on the house and able to pay the installments until the time the house is yours, there's an array of housing loans to choose from. However, there are many other types of housing loans which relates to houses but is not intended to be used for the purchase of a house. These types of loans include, as was mentioned above, taking housing loan for investment purpose, refinancing of existing house after a few years as value of the house rises and mortgaging a house free from any encumbrances to the bank for cash. Currently, housing loan for residential property is one of the cheapest loans around among a bank’s various products and is a favorite way to own a property under your own name.

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