Flexi vs Non-Flexi Property Loan Options
So what is a Flexi loan?
Before we can understand what a Flexi loan is, we first have to understand the principles behind the basic term loan and that of interest calculations for property loans.
The interest calculations for property loans follow that of the reducing balance method. Every time your installments are paid, a portion of it goes towards servicing the interest, while the remainder goes towards paying down the principal amount owed. When the principal amount owed is higher, a larger portion of the installment goes towards servicing the interest. This money is what some people call "burnt".
It is to the benefit of the borrower to pay as little interest as possible. So some borrowers try to make additional payments and bullet payments (large payments of cash) to their loans whenever possible to reduce the principal amount owed. This helps to save on interest payable.
However, this presents another problem to the borrower known as a liquidity problem. What if they had an emergency and suddenly needed to use the cash?
Basic Term Loan
A term loan is a loan with a fixed repayment schedule. Back then, all property loans in Malaysia were basic term loans. It was not easy for a borrower to make additional payments to their loans. They had to write in to the bank explicitly to request for such an arrangement to be made possible.
Some borrowers made the mistake of making additional payments to their loans without explicitly requesting such an arrangement, thinking it would reduce the principal amount owed. It didn't. The money just sat there in the bank (as Pre-Payment), neither earning an interest as a deposit, nor saving them interest on the loan amount.
Additionally, back then, any additional money paid to these term loan accounts in most cases could not be easily taken out in the case of an emergency. So borrowers had to be absolutely certain before they made any additional payments that it was not money they would need.
There were 2 reasons for such arrangements then:
Banks were reluctant to let their customers reduce their principal amounts as they pleased because they earned money on interest payments.
Banking systems and processes then were not as advanced as today.
Semi-Flexi loans are a natural evolution from the basic term loan. Not too long ago, banks in Malaysia started lowering the barriers for borrowers to make additional payments to reduce the principal amount owed. There was no longer any need to write in explicitly to request for such an arrangement. Additional payments made did not go in as Pre-Payment, but went to work immediately, reducing the loan amount.
Additionally, banks also made it possible for customers to withdraw any additional money paid ahead of schedule to the loan. However, this would incur some processing time, as well as a processing fee usually in the range of RM50 to RM100 per withdrawal from the loan account.
While not entirely liquid (meaning you could withdraw money as you please), the money still remains accessible in case of an emergency. Different banks have different procedures for withdrawing this money. Some still require the customer to write in, while others have made it accessible via their Internet Banking portals.
Today, all property Term Loans offered by the major commercial banks are Semi-Flexi by default.
At its basic, a fully Flexi loan is one that allows a customer to take out and put in money to the loan account as and when the customer pleases without incurring any additional charges or procedures. This is achieved by tying a Current Account to the loan. Every month, the installment amount is deducted from the Current Account as scheduled. But any additional money parked inside the current account will go towards reducing the principal amount owed.
So if a customer has taken a full Flexi property loan of RM500k with a bank and the customer has RM400k in cash parked inside the linked current account, interest calculations will only be based on RM500k - RM400k, saving the borrower RM400k in interest.
However, it should be noted that there 2 disadvantages to fully flexi loans:
Typically, most banks charge a monthly fee for the maintenance of the current account, ranging from RM5 - RM10 a month.
Between Term Loans and Full-Flexi Loans, some banks offer a better interest rate for a Term Loan.
Today, not all banks offer Full Flexi property loan options.