If you are comparing housing loans in Malaysia, you’ll often come across two terms: reducing balance interest and flat interest rate. At first glance, both might look similar, but the way they are calculated leads to very different total costs.
Knowing how each method works — and calculating the true housing loan cost — can save you thousands of ringgit over the life of your mortgage.
What Is a Flat Interest Rate?
A flat rate loan charges interest on the original loan amount for the entire tenure, regardless of how much you’ve already repaid.
Formula: Total Interest=Principal×Rate×TenureTotal \ Interest = Principal \times Rate \times Tenure Monthly Payment=Principal+Total InterestNumber of MonthsMonthly \ Payment = \frac{Principal + Total \ Interest}{Number \ of \ Months}
Example (Flat Rate):
- Loan: RM400,000
- Rate: 4% per year
- Tenure: 30 years (360 months)
Total interest = RM400,000 × 4% × 30 = RM480,000
Total repayment = RM880,000
Monthly repayment = RM2,445
What Is a Reducing Balance Interest Rate?
In a reducing balance loan, interest is charged only on the outstanding balance. As your principal decreases each month, the interest portion also reduces.
Formula: M=P×r×(1+r)n(1+r)n−1M = \frac{P \times r \times (1+r)^n}{(1+r)^n – 1}
Where:
- P = Loan amount
- r = Monthly interest rate (annual ÷ 12)
- n = Number of months
Example (Reducing Balance):
- Loan: RM400,000
- Rate: 4% per year (0.0033 monthly)
- Tenure: 30 years (360 months)
Monthly repayment = RM1,910
Total repayment = RM687,600
Flat vs Reducing Balance: Side-by-Side
| Item | Flat Interest (4%) | Reducing Balance (4%) |
|---|---|---|
| Loan Amount | RM400,000 | RM400,000 |
| Tenure | 30 years | 30 years |
| Monthly Payment | RM2,445 | RM1,910 |
| Total Cost | RM880,000 | RM687,600 |
| Extra Cost (Flat vs Reduce) | +RM192,400 | — |
👉 On the same RM400,000 loan, you’d pay nearly RM200,000 more under a flat rate loan.
Why the Difference Matters
- Flat rate loans are more common for personal loans and car loans in Malaysia.
- Housing loans from banks almost always use reducing balance interest because it reflects the true cost of borrowing.
- Flat rates may look cheaper at first (e.g., “4% flat”), but the effective interest rate (EIR) is usually 1.7x to 2x higher.
Early Settlement: Which Works Better?
- With flat rate loans, interest is pre-calculated, so settling early doesn’t save much.
- With reducing balance loans, early repayment lowers your outstanding balance, so you immediately pay less interest.
This is why most homeowners prefer reducing balance structures — you keep more control over your loan cost.
How to Compare Loan Offers Smartly
When comparing loans in Malaysia:
- Ask if the rate is flat or reducing.
- Use a home loan repayment calculator to see actual monthly payments.
- Check your affordability with a loan eligibility tool.
- Compare offers side-by-side using a rate comparison calculator.
FAQs
Q: Do Malaysian banks use flat rate for home loans?
No. Housing loans from banks are almost always reducing balance. Flat rates are usually for personal loans.
Q: Why does a 4% flat rate look cheaper than 4% reducing balance?
Because it doesn’t show the effective rate — which is closer to 7–8% per year.
Q: Can I refinance a flat rate loan into a reducing balance loan?
Yes, but you should check early settlement fees and refinancing costs.
Q: Which method saves more money long-term?
Reducing balance interest is usually much cheaper, especially on longer tenures like 25–30 years.
Fredrick is the creator behind houseloancalculatormalaysia.online, dedicated to helping Malaysians easily understand and calculate their home loan payments. With a focus on accuracy and simplicity, Fredrick develops reliable tools and clear guides to empower users to make informed financial decisions. His goal is to provide trustworthy, user-friendly resources that save time and reduce confusion in the complex world of home loans.