DEPARTMENT OF ESTATE MANAGEMENT FACULTY OF THE BUILT ENVIRONMENT UNIVERSITY OF MALAYA PROPERTY FINANCE

(BVEV3120) COURSEWORK SESSION 2012/2013 TITLE: HOUSING MORTGAGE IN MALAYSIA; ISLAMIC OR CONVENTIONAL FINANCING/LOAN AS A PROSPECTIVE HOUSE BUYER NAME: AUGUSTINE OBUM ONYEBUCHI MATRIC NUMBER BEE100709 LECTURER: Dr. SR ROSLI SAID NOVEMBER 2012

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Table of Content Page cover Table of content 1.0 Introduction 1.1 Scope of Study 1.2 Islamic Finance 1.3 Conventional Finance 2.0 consideration 2.1Property Market 2.2 Warranty 2.3 Cost 2.4 Financing 3.0 Mortgage Product in the Market 3.1 Common Characteristics of Housing loan products 3.2 Margin of Financing 3.3 Loan Tenure 3.4 Features 3.6 Early Termination Penalty 3.7 Partial Payment 3.8 House Owner Insurance 3.9 Lock in Period 4.0 Islamic vs. Conventional 4.1 Calculating the Annual Payment 5.0 Root for decision making 6.0 Conclusion 7.0 References 1 2 3 4 4 5 5 6 6 7 10 13 14 15 15 15 15 15 16 16 17 17 21 23 23

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1.0

Introduction
Housing is a major aspect of human development. As noted by the World Bank (1992), housing investment typically accounts for 2% to 8% of GNP, and the flow of housing services for an additional 5% to 10% of GNP. Residential real estate represents around 30% of world wealth, greater than both bonds (27%) and equities (19%). Residential construction is a major employer often accounting for more than 5% of total employment. Housing is an important economic sector with linkages to the real and financial parts of the economy. A healthy housing industry is critical to the nation’s economy and more specifically the sustainability of its financial system. The New Economic Policy (NEP) in Malaysia to a certain extent has achieved its objective in income distribution and in urbanisation as well. By comparison with other countries, Malaysia has achieved its distributive objectives. The indicators are rapid urbanisation and increase in urban population. The ratio of Bumiputra population also has increased as a result of migration from rural areas. The need and demand for housing is reflected also by the population increase. Secondly, the urban people have shelter to stay because the system has catered for their need. The standards of housing we want are a different matter. But our housing standards are higher compared with other countries. Even squatter house standards are very high, equivalent to medium costs in other countries. In housing production, Malaysia has achieved the numbers, but not in terms of the absolute target of 70% by the private sector and 30% by the public sector. In term of wealth in relation to housing, the distribution has been effective. But providing housing through subsidy is not the answer. It has a minor effect. The economy cannot go on subsidising, because it will drain the resources dry. The better approach is to provide employment and to increase the peoples' incomes. We have achieved this- full employment. In this paper, a critical look at the two mortgage system that exists in the country will be discussed. The issue of affordable home is imperative but unfortunate the affordability of the home is somewhat vague in terms of definition going by the article of Dr Sr Rosli Said, a senior lecturer at the Department of Estate Management, Faculty of Built Environment, University of Malaya published on 7th of September 2012 by New StraitsTimes.

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In other to resolve the issue of housing cost in Malaysia Dr Sr Rosli Sr suggest that the most important thing that the government should do to help the property industry in Malaysia is to tackle the issue of affordability due to high prices in the real estate market, particularly the housing sector. A new mechanism should be established to control price of properties which has spiralled out of control. As young graduate who secured a new job and need a decent accommodation, will I be able to compete in market considering the salary that I earn? This is a question that determines how the decision will be conducted given the available options.

1.1

Scope of Study
The scope and objective of the study is to test the understanding of the student on

the housing finance and mortgages available in the market for the student upon graduation. As a fresher in the in the society decision makings are very critical in chosen a property considering the salary earned. Buying a first home is not an easy task. It is a serious longterm commitment to the buyer.

For the purpose of this paper a number of assumptions were made, such as: 1. 2. 3. 4. The year after graduation is 2.5 years. The monthly income per month is RM3, 000 or RM36, 000 per annum. There are no other commitments. No car loans and no credit card. There is sufficient own fund to pay in cash for all cost required in obtaining the loan from the bank such as the legal charges, stamp duty and other charges in the process of obtaining the loan from the bank.

1.2

Islamic Finance
Quoting the article on New StraitsTimes of 28 September 2012, Dr Sr Rosil Said,

Senior Lecturer, Department of Estate Management, Faculty of Built Environment, University of Malaya, defines Islamic Finance as “Islamic Banking which follows Shariah law”. The banking system has been in operation in Malaysia since the enactment of Islamic Banking Act 1983. Since the enactment, the country has been practicing both Conventional and Islamic Banking system until date. Financial products that comply with Shariah, are evolving from a novelty into normal part of doing business in much of the developing world. The difference between Islamic Financing and Conventional Financing
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will be discussed in making decision on the best housing finance system for the purpose of the loan application.

1.3

Conventional Finance
Conventional Finance is a banking system in which loans are given to people at

fixed interest rates and more the time period taken to pay, more becomes the amount to repay. In his paper on Islamic Contributions to Economics and Finance given the present global economics situation by Dr Abdullah AlShami (Professor of Comparative Jurisprudence and Islamic Studies) The Petroleum Institute Abu Dhabi, presented during Annual General Conference on a Post Recession Scenario for Malta on May 22, 2009 he described Conventional finance as follows;       A finance based on the concept of loaning on a fixed rate of interest. Check on financial background before lending to ensure repayment The longer the borrower takes to pay, the more he will pay One type of loan is Adjustable Rate Mortgages (ARM) that allow banks to increase the interest rate during payment Another type of loan is “sub-prime”, which is a loan given to people who do not meet the prime requirements for a loan. Banks also resell loans to other parties to acquire more cash to lend. The borrower will pay back to the new owner of the loan.

2.0

Considerations.
With in-depth knowledge of Islamic Finance and Conventional Finance is the

following steps will be considered before making a choice between the two. 2.1 Identifying of Property.

In identifying property for purchase it is important that the following information is taking note of.     A fresher with only 2.5 years of working experience. Single not married so couple application of loan is out of contest The salary is RM3, 000 per month and RM36, 000 per annum. The type of property and the price of property.

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  

The location, surrounding and the proximity of my proposed purchase to my place of work. Accessibility through public transportation The tenure of the loan is 30years.

Affordable house prices depend on income and other financial commitments. Usually home buyers will purchase a house which the value is 1.5 to 2.5 times than their gross annual income. For example, in this case, with an annual gross income RM36, 000.00, usually they will buy a house valued at between RM54, 000 to RM90, 000. In addition, the monthly payment need not exceed one third of their monthly gross income. However, in this case, assuming the purchaser have no other loans and will not make another loan before income increases, the value of the home can afford to reach RM225, 000. This is because the calculation of 30 years loan with a profit rate of 4.4% (one of product available at market) shows it requires commitment of RM1352 every month. The value of this instalment is less than one third of their gross income. The housing finance or loan for the purpose of this report is basically from the Primary Mortgage Market. The Commercial bank plays an important role in granting the loan. In other to avoid uncertainty in the future, I approached a branch of MayBank Berhad for guidance in making decision on the loan/finance package that is best. In other to make that decision the following steps were taking. With the knowledge of the aforementioned, decision has been made to go for a property that is sub-sale. The property owner is an individual who bought the property cash and intends to sell back for reasons best known to him. The property is a unit in a condominium. The name of the condominium is Petaling Indah Condo Sungai Besi. It is located at Jalan 1C/149 Sungai Besi, off Jalan Sungai Besi, 57100 Kuala Lumpur. The unit is 904 sq ft and it is in good condition. The block is block 10 which recently went through renovation and repainting.

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2.1

Property Market
In his words Tan Sri Jeffrey Cheah, the Chairman of Asian Strategy & Leadership

Institute (ASLI), who is a prominent businessman and property developer, was reported by the Star Biz on 29 August 2012 to have said: “Among the challenges the industry faces is the market perception that the industry is heading towards a property bubble, which is not backed by reasonable evidence. “As a developer, I’m convinced as of now that we shall not be (note the word “shall” in the prescriptive is used) experiencing any such property bubble, as our property prices are still affordable compared with some of our neighbouring cities in the region.” The property market might be affordable but the challenges faced by unemployment should not the over looked. The market within the area the property is located is stable and affordable. The highest price of property within the area goes for RM350, 000.00 to RM400, 000.00. It is dependable on the size and the age of the property. The property is strategically located as location is very important to buyer. The property is location is a walking distance to the Integrated Bus Terminal Bandar Tasik Selatan. It has access to the entire Rail network that exists currently in the country. It is service by Rapid KL buses to various destinations within the Klang Valley. The average rent for a unit of condominium is RM1100 per month. Therefore the property is affordable if my monthly income is RM3, 000.00 and one third of it goes to the servicing of the housing Loan.

2.2

Warranty
The Warranty from the developer is no longer valid because the building is 10

years and above. The property is completed. The rental capital appreciation was obtained from the owner. The units in the condominium at the opened more than 10 years ago and were sold at RM80, 000 per unit. Today it is being sold at the average of RM200, 000 per unit. The rent appreciation is almost on yearly basis. As development comes in the area rent appreciates. The rent has appreciated drastically since the Integrated Bus Terminal at Bandar Tasik Selatan. The appreciation in rent and the capital appreciation with the surroundings and accessibility encouraged me to proceed with the purchase.

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2.3

Cost
The cost incurred for the purchase of the property like the stamp duty, the lawyer’s

fees and other fees outside the unit Price were to be paid from my savings. There is no plan to obtain loan from the bank in making such payments. The only loan applied for is for the house cost and nothing more than that. The 10% financing is from the savings I made over the 2.5 years I have been working. The cost and charges incurred for the securing of the property as follows; 1. Stamp Duty A purchaser of property has to stamp duty to the government when he buys a property. The stamp duty chargeable on the Sales and Purchase Agreement is RM10 each. The stamp duty chargeable on the Memorandum of Transfer is calculated based on the purchase price as follows:   For the first RM100, 000.00, the duty payable is 1% For the next RM400, 00.00, the duty payable is 2% For any sum exceeding RM500, 000.00, the stamp duty payable is 3%

Therefore in this scenario the price of the property is RM225, 000.00, thus study duty payable is calculated as below. The first RM100, 000.00 = 100, 000.00 x 0.01 = RM1, 000.00 The balance 125,000 = 125,000 x 0.02 = Total Stamp Duty = RM2, 500.00 RM3, 500.00

The loan agreement stamp duty is 0.5% of the total money loaned. In this scenario the Loan agreement stamp duty = RM202, 000 x 0.005 = RM1, 102.50 2. Lawyer’s Fee The lawyer/Solicitor’s fee is as follows:   First RM150, 000.00 – 1% Next RM850, 000.00 – 0.7% Next RM2, 000, 000.00 – 0.6%

In this scenario the Lawyer’s fee is calculated as; RM225, 000.00 x 0.01 = RM2, 250.00
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3. Other Fees a. Stamping Fee (per document) – RM10. Total Document is 4 therefore the stamping Fee is RM40.00 b. Adjudication Fee – RM10.00 c. Title Search Fee – RM60 d. Registration Fee – RM100 Total = RM210.00

4. Real Estate Agent’s Fee Agents Fees are regulated by the board of Valuers, Appraisers and Estate Agents Malaysia (LLPEH). Commission is paid either by buyer or seller, subject to a maximum discount of 30% but a minimum fee of RM1, 000.00 per case. The scale is not applicable to sale of foreign properties in Malaysia. First RM500, 000.00 – 2.75% Remainder 2%

In this scenario, there is not Agent Fee paid because the transaction is between the owner and the buyer. The buyer is a professional in real estate and that will save him the cost for real estate agency. The summary of the total cost for the purchase of the unit is listed in the table below; Type of Cost 1. Property Value 2. Stamp Duty 3. Loan Agreement Stamp Duty 4. Lawyer Fees 5. Other Fees TOTAL Amount RM225, 000.00 RM3, 500.00 RM1, 102.50 RM2, 250.00 RM210.00 RM232, 062.50

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2.4

Financing
I opted for Islamic finance because it has numerous advantages over conventional

finance. The obvious advantage is that Islamic Finance follows the Shariah principles. Sharia is the set of Quranic laws that governs a Muslim’s daily life. Financial products that comply with Sharia are becoming part of doing business in all OIC countries in the world and beyond. The table below highlights the differences between Islamic banks and Conventional banks.

Islamic Banks
1. Islamic financing works on the concept of buying and selling where the banking institution purchases the

Conventional Banks
1. Under conventional financing, your outstanding loan consists of principal plus the interest charged on you. The interest is actually the banking institution's cost in obtaining the funds. 2. The functions and operating modes of conventional banks are based on fully manmade principles. 3. It aims at maximizing profit without any restriction. 4. It does not deal with Zakat.

property and subsequently sells it to you above the purchase price. 2. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah. 3. It also aims at maximizing profit but subject to Shariah restrictions. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat. 5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer's business very well. 6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of

5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.

6. It can charge additional money (penalty and compounded interest) in case of defaulters.

compensation and these proceeds is given to charity. Rebates are given for

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early settlement at the Bank's discretion. 7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. 8. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. 9. For the Islamic banks, it must be based on a Shariah approved underlying 7. Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity. 8. Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity. 9. For interest-based commercial banks, borrowing from the money market is relatively easier. 10. Since income from the advances is fixed, it gives little importance to

transaction. 10. Since it shares profit and loss, the Islamic banks pay greater attention to developing evaluations. 11. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects. project appraisal and

developing expertise in project appraisal and evaluations. 11. The conventional banks give greater emphasis on credit-worthiness of the clients.

12. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller. 13. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position.

12. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. 13. A conventional bank has to guarantee all its deposits.

From the point of housing finance, Islamic finance product advantages are: 1. Home sales price was set when entering into contracts 2. There are no additional or hidden costs that will affect the selling price 3. Total payment is not affected by interest rate movements 4. The outstanding amount is not compounded and it gives a better financial planning
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The following principles are adapted to the world banking system:

1.

Wadiah Yad Dhamanah

This is a contract between two parties. The owner of goods and the custodian of goods ensure the safe custody of the goods. The goods are protected from being stolen, lost, destroyed, etc. 'Goods' in this contest can be referred to anything of value.

2.

Mudharabah

This is an agreement made between a party who provides the capital and another, usually an entrepreneur, to enable the entrepreneur to carry out business projects. The agreement will be on a profit-sharing basis, according to a pre-determined ratio agreed upon earlier. In the perspective of Islamic banking, the agreement could be between a depositor and the Bank (as the entrepreneur), or the Bank (as capital provider) and an entrepreneur. In case of losses, they are borne by the providers of funds.

3.

Bai Bithaman Ajil

This contract refers to the sale of assets or goods on a deferred payment basis. Assets or goods requested by the Customer are bought by the Bank which subsequently sells it to the Customer at an agreed price which includes the Bank's mark-up profit. The Customer may be allowed to settle payment by instalments within a pre-agreed period, or in a lump sum.

4.

Istisna

This is a contract of acquisition of assets by specification or order, where the price is paid in advance, but the assets are manufactured or constructed and delivered at a later date.

5.

Ijarah

This is a contract where the benefits/use of an asset is transferred by the owner/lessor to the lessee at an agreed price/rental amount for an agreed period of time or lease period.

6.

Ijarah Thumma Al-Bai This is a type of lease which concludes with the option to buy-back in which the

legal title of the leased asset will be passed to the lessee at the end of the lease period.

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7.

Murabahah This is a sale contract between the Bank and its Customer for the sale of assets or

goods at a price which includes a profit margin agreed by both parties. It involves the purchase of assets or goods by the Bank as requested by its Customer. The assets or goods are sold to the Customer with a mark-up profit. Payment, usually in instalments, is specified in the contract.

8.

Wakalah This refers to the nomination of a person by another to act on behalf or as his

agent.

9.

Kafalah This is a surety given by one party who agrees to discharge a liability of a third

party in case the third-party defaults in fulfilling his obligation.

10.

Bai Dayn This is the provision of financial resources required for production, commerce and

services by way of sale/purchase of trade documents and papers.

11.

Ujr This refers to commission, fees or wages charged for services.

3.0 Mortgage Product in the Market
Repayment Mortgage instrument is a mortgage instrument that is common in Malaysia. The Repayment Mortgage allows me (mortgagor) to pay back the loan in series with a fixed amount. The choice for Repayment Mortgage product is not far fetching. It is meets the requirement as mentioned before like the age and the one third of my income. Repayment Mortgage is of three types. Understanding the types will assist in making final decision when closing the deal. a. Constant Amortisation Mortgage (CAM). This is the calculation of fixed principle payment (amortisation) and fixed annual interest charged on the principal. The amount is then added on the total loan balance until the balance is paid out (fully amortized). The monthly payments decline by fixed amount.

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b. Constant Payment Mortgage (CPM) This is a repayment mortgage product type where the level of payment at a fixed rate calculated on the original loan is paid on agreed period. During the last period, the principal has been paid in total (fully amortized) and the mortgage earns fixed rate based on the outstanding balance. The total principal balance will be reduced each month/year. c. Graduate Payment Mortgage (GPM) This is payment that allows lower mortgage payments in the early years compared with the CPM and CAM. The payment increased from time to time in inline with specified interest at pre-determined rate. Thus Repayment Mortgage Products assume the borrower is expected to increase earnings in the future. The pattern of payment reduces the burden on the borrower (me) at the beginning of life as a fresh graduate. 3.1 COMMON CHARACTERISTICS OF HOUSING LOAN PRODUCTS

3.1.1

Type of Facilities
There are three types of facilities offered. They are term loan, overdraft and

combination of both. The table below illustrates the differences: Term Loan -Monthly instalments are fixed for a period of time. -Payment consists of the loan amount plus the Overdraft Facility -Credit line granted based on predetermined limit. -No fixed monthly Combination -Eg. 70% as term loan and 30% as overdraft -For the term loan portion regular loan instalments are required -Repayment is flexible

instalments as interest is calculated based on daily outstanding balance. -Allows more flexibility to repay the loan -Interest charged is

interest.

generally higher than term loan.

3.2 Margin of Financing
Depending on the market value of the property, the margin of financing can go as high as 95% of the property’s value. This is assessed on factors such as:    Type of property Location of property Borrower’s age
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Borrower’s income

3.3 Loan tenures The length of a housing loan can last up to 30 years or when the borrower reaches the age of 65, whichever is earlier. 3.4 Features
Each loan package differs from one institution to another, so decision cannot base on any single feature. Features like flexible repayment terms or graduated payment schemes need to look for to suit borrower repayment capability. 3.5 Flexibility of loan payments Based on the loan packages that chooses, repayment of monthly loan instalments will incur interest charged on either a daily basis (daily rests) or monthly basis (monthly rests). The principal sum immediately reduces every time a loan instalment is made.

3.6 Early Termination Penalty
If borrower makes an early repayment of your loan in full before the loan tenure expires, the banking institution may impose a penalty for early termination as it would disrupt the banking institution’s cash flow planning. The penalty can either be a flat rate or “X” number of months of interest.

3.7 Partial Repayment
When borrowers have surplus funds, they may want to make payments in excess of their fixed monthly instalments to reduce your loan amount. For partial prepayments, banking institutions may require pre-notification or may impose restrictions on the amount to be prepaid or impose a penalty fee. Borrower need to check whether the loan package allows them to make partial repayments and the procedures involved.

3.8 House Owner Insurance
When borrower purchases a house, it’s extremely important that they provide insurance coverage for their home as this acts as a form of financial security for you and your loved ones. Following insurance products need to Consider:   House Owner/Fire Insurance Policy Mortgage Life Assurance (MRTA)

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3.9 Lock in period
Locking period is a term used by the bank to certify that you are bound by the conditions to not cancel the loan agreement with the bank before beyond the compulsory period. This means that if borrower plans to sell, to settle the loan or to refinance a house later they will be penalized according to the loan balance. Basically the only mandatory period is 3 years. Long locking period is not a problem if they do not intend to sell real estate or fund it again. But in record of BNM, the BLR rate will change every 5 years or more. For example, in a period of 5 years after this borrowers expect the BLR will change, when the BLR up crowds of investors or lenders will convert the existing loan package to package fixed and not too high. At that time you will have problems, because your loan is subject to the conditions and duration must be known as the lock in period. That is mean if banks offer attractive rate loans, but lock in period is 8 years, that is not good choice. This kind of lock in period need to be ignored since borrower cannot divine the future, but with thorough preparation and smart financial planning they can avoid paying penalties to the bank. 3.10 Zero Entry Cost (ZEC) and Non-Zero Entry Cost (NZEC) Apart from the above factors, borrower should understand the difference between the Zero Entry Cost (ZEC) and Non-Zero Entry Cost (NZEC). Zero entry cost is basically aimed at the legal costs for the loan application process. This means that if borrower takes zero entry cost package all your legal fees paid by the bank. Even so ZEC and NZEC have different interest rates.

4.0 Islamic Mortgage Repayment vs. Conventional Mortgage Repayment
Facts: 1. The House is sold at RM225,000.00 (Property Value) 2. Loan amount is 90% (RM202, 500.00) 3. Stamp duty, lawyer fees and other payments were paid by my previous savings 4. The bank rate is 4.4% per annum (MayBank Bank) 5. Tenure of loan is 30 years (Mortgage Term) 6. Monthly income is RM3, 000.00 7. Annual income is RM36, 000.00
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4.1 Calculating the Annual Payment Total Loan Annuity RM1 will purchase for 30years @ 4.4% (Bank Rate) Annual Payment 0.0607 RM12, 286 RM202, 500.00

LOAN REPAYMENT (CONVENTIONAL)

Property Value Loan Amount (90%) Mortgage Term Interest Rate

225,000.00 202,500.00 30 4.4% (10% down payment) Year p.a.

Year

Outstanding Principle

loan Redemption

Interest

Annual Payment

1 2 3 4 5 6 7 8 9 10 11

202500.00 199124.07 195599.60 191920.06 188078.62 184068.15 179881.22 175510.07 170946.59 166182.31 161208.41

3375.93 3524.47 3679.54 3841.44 4010.47 4186.93 4371.15 4563.48 4764.28 4973.90 5192.76

12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00

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12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

156015.65 150594.41 144934.64 139025.84 132857.05 126416.83 119693.25 112673.83 105345.55 97694.83 89707.48 81368.68 72662.98 63574.22 54085.56 44179.40 33837.37 23040.29 11768.14

5421.24 5659.77 5908.80 6168.79 6440.22 6723.58 7019.42 7328.28 7650.72 7987.35 8338.80 8705.70 9088.76 9488.66 9906.16 10342.03 10797.08 11272.15 11768.14

12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00

Total

202, 500.00

368, 580.00

LOAN PAYMENT (ISLAMIC)
Rental Division

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Year

Yearly Rent (RM) (A)

Yearly Redemption (RM) (B)

Total Payment (RM) C=(A)+(B)

Customer’s Ownership (%)

Customer’s Customer (RM) Bank (RM) Equity (RM)

Bank’s Equity (RM)

Bank’s Cash flow (RM)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 5536 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 6750 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00 12,286.00

10% 14.4 18.8 23.2 27.6 32 36.4 40.8 45.2 49.6 54 58.4 62.8 67.2 71.4 76 80.4 84.8 89.2 93.6 98 102.4 106.8 111.2 115.6 120 124.4 128.8

22, 500.00

202, 500.00

(202, 500.00)
6750.00 13500.00 20250.00 27000.00 33750.00 40500.00 47250.00 54000.00 60750.00 67500.00 74250.00 81000.00 87750.00 94500.00 101250.00 108000.00 114750.00 121500.00 128250.00 135000.00 141750.00 148500.00 155250.00 162000.00 168750.00 175500.00 182250.00

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28 29 30

5536 5536 5536

6750 6750 6750

12,286.00 12,286.00 12,286.00

133.2 137.6 142

189000.00 195750.00 202500.00

Total

166080

202, 500.00

368, 580.00

4.1.1 Product Selection (Bank) Product name: MaxiHome-1 Product description: A variable-rate, Shariah-compliant home financing based on the concept of Bai’ Bithaman Ajil (BBA) Margin of Financing 90% without MT & HBT 95% with MT & HBT Property type Interest Rates Completed and under construction. BLR-2.20% (property value RM200kRM300k) Interest calculation Loan Tenure Daily Max 30 years or age 60 (whichever is earlier) BFR (Reference Rate) Overdraft Fees & Charges 1. Legal Fees on Loan Agreement 2. Disbursement Fee 3. Processing Fee 4. Valuation Fee 5. Other Fees & Charges: a. Insurance Requirement: MRTA, Takaful (Islamic insurance) b. Fire Insurance c. House Owner Policy Payable by Borrower upfront Payable by Borrower upfront Optional 1. Payable by borrower upfront 2. Payable by borrower upfront 3. Payable by Borrower upfront 4. Payable by Borrower upfront 6.60% No

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Promotion Period ZEC or NZEC Minimum loan amount

NIL NZEC Minimum property value of RM50,000 and a minimum loan amount of RM10,000

Repayment mode Loan feature: 1. Lock-in period (years) 2. Early settlement penalty (% of loan interest) 3. Redraw facility

Daily rest interest

5.0 years 2%

NIL

Other special benefits Contact Source

NIL 03-2070 8833 http://www.maybank2u.com.my/ 5.0 ROOT FOR DECISION MAKING 1. Lowest interest, or profit rate

Lowest profit rate, or called Based Financing Rate (BFR) is always better because it will save a lot of money. Total interest will be lower with lower BFR. Basically if there is a product with low BFR than other products with same characteristic, then that product will be chooses as best decision. 2. Choose Term loan instead of combination of term loan and overdraft

Both are good choice. Both have advantage and disadvantage. However, in this scope of borrower, which is those new in career, there is no need to take overdraft options. Later when they need overdraft they can refinance with other product from other bank. It may cause by incensement of family gross income by time.

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3. Choose lowest lock in period Usually lock in period is 3 years. More than 3years is not a good choice. Decision on best product will be made only based on 3 years or less lock in period. 4. Choose Zero Entry Cost (ZEC) instead of Non-Zero Entry Cost (NZEC)

ZEC or NZEC is depending on how much BFR given for that product. Usually it is better to take ZEC because fees are much cheaper than percentage different for BFR of ZEC compare to BFR of NZEC. For example if the package has a rate of BLR-ZEC 2:00, while NZEC is BLR-2.3 according to a specific bank. According to the long term, there is better to pay legal fees on the loan. Even the difference between 0.03% seems too little, however it is not so. It is because if borrower can save RM200 per month, meaning that in a year they can save RM2400 or RM24, 000 in 10 years. It is better to save RM24, 000 and pay only RM2500 for legal fees.

5. Choose Flexibility of loan payments instead graduated payment scheme and fixed of loan payments. Fixed of loan payment also can be considered as good decision for this scope of borrower. However flexibility is better. 6. Choose Daily rest interest for Repayment mode instead of monthly.

As a new people in career, it is assumed that young couple may look for extra income from others sources beside fixed monthly gross salary. They can take benefit to get lower interest counts when put in payment more than one time in one month. Monthly rest interest does not count interest based on each payment, but it is count based on once per month only. That is mean monthly rest interest not suitable for fresh graduate couple.

7. Other special benefits If there is any special benefit highlight in product, it may be extra benefit to choose that product. However, borrower should not take this as main measurement because other characters as mentioned above much more important (BFR, lock in period, flexibility)

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6.0 CONCLUSION: The Islamic Loan Finance product and has numerous advantage compare to Conventional Loan Finance. Different bank offers different package of the loan. An assessment was done on three banks. BFR rate is lower in one bank than the other two bank rates. Product 2 and 3 rejected earlier because of this scope of borrower does not want graduate and monthly type of BFR. It is conspicuous that the choice over conventional banking where made because of the following reasons listed below. 1. Fixed monthly payment will help the customer to balance their monthly budget.

2. Since 2007 Budget, it is cheaper by 20 per cent as compared to conventional loan. Stamp duty is waived for the redeemed amount when refinancing from a conventional loan to an Islamic home finance. 3. Whilst conventional loan’s penalty fee for early settlement (prepayment) is set at a certain percentage, the Islamic bank will charge based on the bank’s prevailing cost of funds. However, the fee differs from one Islamic bank to another.

4. Islamic banking is based on Base Financing Rate (BFR) which the bank can actually adjust (the rent) based on the prevailing market conditions but not more than the ceiling rate (cap rate), i.e. the maximum profit an Islamic finance provider will earn.

5. There is no interest rate cap for conventional loans.

7.0 References
1.
COVER STORY: Should you get an Islamic mortgage? RED New Straits Times http://www.nst.com.my/red/cover-story-should-you-get-an-islamic-mortgage1.149176#ixzz2DYHrSIip

2. http://www.mifc.com/index.php?ch=151&pg=736&ac=393&bb=629 3. Lecture Notes 4. Bank Call centre 5. Loan Street Calculator

6. Iproperty.com
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