1

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 1

Table of content 2

1.0 Introduction 3

1.1 Scope of Study 4

1.2 Islamic Finance 4

1.3 Conventional Finance 5

2.0 consideration 5

2.1Property Market 6

2.2 Warranty 6

2.3 Cost 7

2.4 Financing 10

3.0 Mortgage Product in the Market 13

3.1 Common Characteristics of Housing loan products 14

3.2 Margin of Financing 15

3.3 Loan Tenure 15

3.4 Features 15

3.6 Early Termination Penalty 15

3.7 Partial Payment 15

3.8 House Owner Insurance 16

3.9 Lock in Period 16

4.0 Islamic vs. Conventional 17

4.1 Calculating the Annual Payment 17

5.0 Root for decision making 21

6.0 Conclusion 23

7.0 References 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 nations 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 long-

term commitment to the buyer.

For the purpose of this paper a number of assumptions were made, such as:

1. The year after graduation is 2.5 years.

2. The monthly income per month is RM3, 000 or RM36, 000 per annum.

3. There are no other commitments. No car loans and no credit card.

4. 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, Im 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 lawyers

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 = RM2, 500.00

Total Stamp Duty = 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. Lawyers Fee

The lawyer/Solicitors 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 Lawyers 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 Agents 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 Amount

1. Property Value RM225, 000.00

2. Stamp Duty RM3, 500.00

3. Loan Agreement Stamp Duty RM1, 102.50

4. Lawyer Fees RM2, 250.00

5. Other Fees RM210.00

TOTAL 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 Muslims 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 Conventional Banks

1. Islamic financing works on the

concept of buying and selling where the

banking institution purchases the

property and subsequently sells it to you

above the purchase price.

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

Islamic banks are based on the principles

of Islamic Shariah.

2. The functions and operating modes of

conventional banks are based on fully

manmade principles.

3. It also aims at maximizing profit but

subject to Shariah restrictions.

3. It aims at maximizing profit without any

restriction.

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.

4. It does not deal with 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.

5. Lending money and getting it back with

compounding interest is the fundamental

function of the conventional banks.

6. The Islamic banks have no provision

to charge any extra money from the

defaulters. Only small amount of

compensation and these proceeds is

given to charity. Rebates are given for

6. It can charge additional money (penalty

and compounded interest) in case of

defaulters.

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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.

7. Very often it results in the bank's own

interest becoming prominent. It makes no

effort to ensure growth with equity.

8. It gives due importance to the public

interest. Its ultimate aim is 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 the Islamic banks, it must be based

on a Shariah approved underlying

transaction.

9. For interest-based commercial banks,

borrowing from the money market is

relatively easier.

10. Since it shares profit and loss, the

Islamic banks pay greater attention to

developing project appraisal and

evaluations.

10. Since income from the advances is

fixed, it gives little importance to

developing expertise in project appraisal

and evaluations.

11. The Islamic banks, on the other hand,

give greater emphasis on the viability of

the projects.

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.

12. The status of a conventional bank, in

relation to its clients, is that of creditor and

debtors.

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.

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 Overdraft Facility Combination

-Monthly instalments are

fixed for a period of time.

-Payment consists of the

loan amount plus the

interest.

-Credit line granted based

on predetermined limit.

-No fixed monthly

instalments as interest is

calculated based on daily

outstanding balance.

-Allows more flexibility to

repay the loan

-Interest charged is

generally higher than term

loan.

-Eg. 70% as term loan and

30% as overdraft

-For the term loan portion

regular loan instalments

are required

-Repayment is flexible

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 propertys value. This is assessed on factors such as:

Type of property

Location of property

Borrowers age

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Borrowers 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 institutions 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 pre-

paid 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, its 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 RM202, 500.00

Annuity RM1 will purchase

for 30years @ 4.4% (Bank Rate) 0.0607

Annual Payment RM12, 286

LOAN REPAYMENT (CONVENTIONAL)

Property Value 225,000.00

Loan Amount (90%) 202,500.00 (10% down payment)

Mortgage Term 30 Year

Interest

Rate

4.4% p.a.

Year Outstanding

Principle

loan

Redemption

Interest Annual

Payment

1 202500.00 3375.93 12,286.00

2 199124.07 3524.47 12,286.00

3 195599.60 3679.54 12,286.00

4 191920.06 3841.44 12,286.00

5 188078.62 4010.47 12,286.00

6 184068.15 4186.93 12,286.00

7 179881.22 4371.15 12,286.00

8 175510.07 4563.48 12,286.00

9 170946.59 4764.28 12,286.00

10 166182.31 4973.90 12,286.00

11 161208.41 5192.76 12,286.00

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12 156015.65 5421.24 12,286.00

13 150594.41 5659.77 12,286.00

14 144934.64 5908.80 12,286.00

15 139025.84 6168.79 12,286.00

16 132857.05 6440.22 12,286.00

17 126416.83 6723.58 12,286.00

18 119693.25 7019.42 12,286.00

19 112673.83 7328.28 12,286.00

20 105345.55 7650.72 12,286.00

21 97694.83 7987.35 12,286.00

22 89707.48 8338.80 12,286.00

23 81368.68 8705.70 12,286.00

24 72662.98 9088.76 12,286.00

25 63574.22 9488.66 12,286.00

26 54085.56 9906.16 12,286.00

27 44179.40 10342.03 12,286.00

28 33837.37 10797.08 12,286.00

29 23040.29 11272.15 12,286.00

30 11768.14 11768.14 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)

Customers

Ownership

(%)

Customers

Equity

(RM)

Banks

Equity

(RM)

Banks

Cash flow

(RM) Customer

(RM)

Bank

(RM)

0 10% 22, 500.00 202, 500.00 (202, 500.00)

1 5536 6750 12,286.00 14.4 6750.00

2 5536 6750 12,286.00 18.8 13500.00

3 5536 6750 12,286.00 23.2 20250.00

4 5536 6750 12,286.00 27.6 27000.00

5 5536 6750 12,286.00 32 33750.00

6 5536 6750 12,286.00 36.4 40500.00

7 5536 6750 12,286.00 40.8 47250.00

8 5536 6750 12,286.00 45.2 54000.00

9 5536 6750 12,286.00 49.6 60750.00

10 5536 6750 12,286.00 54 67500.00

11 5536 6750 12,286.00 58.4 74250.00

12 5536 6750 12,286.00 62.8 81000.00

13 5536 6750 12,286.00 67.2 87750.00

14 5536 6750 12,286.00 71.4 94500.00

15 5536 6750 12,286.00 76 101250.00

16 5536 6750 12,286.00 80.4 108000.00

17 5536 6750 12,286.00 84.8 114750.00

18 5536 6750 12,286.00 89.2 121500.00

19 5536 6750 12,286.00 93.6 128250.00

20 5536 6750 12,286.00 98 135000.00

21 5536 6750 12,286.00 102.4 141750.00

22 5536 6750 12,286.00 106.8 148500.00

23 5536 6750 12,286.00 111.2 155250.00

24 5536 6750 12,286.00 115.6 162000.00

25 5536 6750 12,286.00 120 168750.00

26 5536 6750 12,286.00 124.4 175500.00

27 5536 6750 12,286.00 128.8 182250.00

20

28 5536 6750 12,286.00 133.2 189000.00

29 5536 6750 12,286.00 137.6 195750.00

30 5536 6750 12,286.00 142 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 Completed and under construction.

Interest Rates BLR-2.20% (property value RM200k-

RM300k)

Interest calculation Daily

Loan Tenure Max 30 years or age 60 (whichever is

earlier)

BFR (Reference Rate) 6.60%

Overdraft No

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

1. Payable by borrower upfront

2. Payable by borrower upfront

3. Payable by Borrower upfront

4. Payable by Borrower upfront

Optional

Payable by Borrower upfront

Payable by Borrower upfront

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Promotion Period NIL

ZEC or NZEC NZEC

Minimum loan amount Minimum property value of RM50,000 and

a minimum loan amount of RM10,000

Repayment mode Daily rest interest

Loan feature:

1. Lock-in period (years)

2. Early settlement penalty (% of loan

interest)

3. Redraw facility

5.0 years

2%

NIL

Other special benefits NIL

Contact 03-2070 8833

Source 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 loans penalty fee for early settlement (prepayment) is set at a

certain percentage, the Islamic bank will charge based on the banks 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-mortgage-

1.149176#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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Appendix

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