Buying a house is an exciting event. It will probably be the biggest purchase you will ever make in your life. Understanding the steps involved in securing a housing loan will help you save time and avoid uncertainty and anxiety. This booklet gives you an insight into the various issues on financing a house and outlines the major steps in the overall process of financing a house. It guides you through the basics, explains the technical terms and gives you invaluable tips on financing a house.
BUYING A HOUSE
Buying a house is a major step, so it deserves careful thought and planning. If you are buying a property under
construction, you should check the background of the developer. You should ensure that the developer:
- Has a valid licence issued by the Ministry of Housing and Local Government which is still in force (not expired)
- Has a valid advertising and selling permit issued by respective local authority which is still in force
You have the right to enquire from the developer, information on licence and permit. You can also refer to the Ministry of Housing and Local Government for further clarification. A developer with a good track record reduces the risk of the project being abandoned.
WHAT CAN I AFFORD
Before you commit to purchase a property, you should first work out a budget to help you determine how much you can afford and the ceiling price on any property you may wish to buy. As a guide, your monthly commitments on paying installments for your house, car and other payments should not exceed 1/3 of your gross monthly household income.
ii. Withdrawal from Employee Provident Fund (EPF) account
iii. Loan facility from a financial institution
You should have sufficient personal savings to pay for the down payment and other related costs associated with buying a house. A good estimate would be about 10%-20% of the purchase price as down payment and another 3%-5% for related costs, such as legal fees and stamp duties.
You could also withdraw from your Account 2 to make the initial down payment. Please contact your nearest EPF office to inquire about your withdrawal eligibility
CHOOSING YOUR FINANCIAL INSTITUTION
You should shop around before you decide on any financial institution. Remember that when you take up a housing loan, you will be dealing with the financial institution on a regular basis for a period of time. Therefore, you should also 3 consider factors other than just lower interest rates. Below are some of the factors you should consider:
How professional is the financial institution in dealing with customers?
• Does it offer quality service in terms of efficiency and reliability?
• What are the available loan packages and which package suits you best?
• What are the charges involved? For example, legal fees, related government fees and charges, disbursement fees and others. You should also be informed when and how often these charges are to be paid
An innovative financial institution may offer a more suitable loan package that suits your needs and their application
process may be faster and hassle-free. It usually takes about one to two weeks for your loan application to be approved from the time you submit all relevant documentation.
LOAN APPLICATIONS: DOCUMENTS REQUIRED
You need to provide the following basic documents before the financial institution can process your loan application:
A photocopy of identity card or passport
• Your latest 3 months’ salary slip
• Your latest income tax return form (form J) or EA form
• Sale and Purchase Agreement/deposit or booking receipt/letter of offer from the housing developer
• A photocopy of the land title (if any)
• The latest bank statements (compulsory in the absence of salary slips and/or Form J/EA Form) dating back six months/savings passbook/fixed deposits
• Valuation report for completed houses and/or
If you are self-employed, you need to provide your business registration documents, latest 3 months bank statements, latest financial statements and other supporting documents to support your income
However, some financial institutions may require additional supporting documents.
Upon acceptance of the letter of offer, you will need to appoint a lawyer to draw up the loan documentation for you. Normally, you would select your lawyer from a list of panel lawyers provided by your financial institution. Some of these documents need to be submitted to the relevant government authorities for registration and to the Stamp Office for stamping.
Upon completion of the above, these registered documents are then submitted to the financial institution and you will be given a copy of the Loan Agreement. In general, the time frame for the completion of this legal process should
not exceed 6 months.
ASSESSING YOUR LOAN REPAYMENT CAPACITY
A common criterion is that your monthly loan installment repayment should not be more than 1/3 of your gross monthly household income. If you have savings or fixed deposits, they can be used to support your loan application as financial institutions may take them into account in evaluating your eligibility. Different financial institutions have different criteria in calculating the repayment capacity. In the case of a floating rate loan, you should also note that your monthly repayment may increase substantially when interest rates go up.
For example, when there is an increase in the Base Lending Rate (BLR), the interest rate on your loan will also go up, and your repayment would be higher. However, in most cases, financial institutions would allow you to pay the fixed amount of monthly repayment throughout the loan tenure and would make any adjustment caused by the variation in interest rate by increasing or shortening the loan tenure. You should check this out with your financial institution.
MARGIN OF FINANCING
The amount of financing provided by a financial institution depends on the market value (for completed properties only) or purchase price of the house, whichever is lower. The margin of financing could go as high as 95% of the value of the house. It is assessed on factors such as:
- Type of property
- Location of property
- Age of the borrower
- Income of the borrower
The length of a loan can range anytime up to 30 years or until the borrower reaches age 65 (or any other age as
determined by the financial institution), whichever is earlier.
Each financial institution packages its housing loans differently. You should examine all the features of a loan package and not just base your decision on any single feature. Pricing is just one consideration; other features like flexible repayment terms could balance the scale or even translate into greater loan savings. Financial institutions generally offer housing loan packages either in the form of a term loan, overdraft, or a combination of a term loan and overdraft.
COMMON HOUSING LOAN PACKAGES OFFERED BY FINANCIAL INSTITUTIONS
– A facility with regular predetermined monthly instalments. Instalment is fixed for period of time, say 30 years
– Instalment payment consists of the loan amount plus the interest
- – A facility with credit line granted based on predetermined limit
– No fixed monthly instalments as the interest is calculated based on daily outstanding balance
– Allows flexibility to repay the loan anytime and freedom to re-use the money
-Interest charged is generally higher than the term loan
- Term loan and overdraft combined
– A facility that combines Term Loan and Overdraft. For example, 70% as term loan and 30% as Overdraft
– Regular loan instalment on the term loan portion is required
– Flexibility on the repayment of overdraft portion
DAILY RESTS VS MONTHLY RESTS
Financial institutions may charge you interest either on daily rests or monthly rests depending upon the products offered. In the case of daily rests, the loan interest is calculated on a daily basis, while in the case of monthly rests, interest is calculated once a month based on the previous month’s balance. Under both types of loan, the principal sum immediately reduces every time a loan instalment is made.
GRADUATED PAYMENT SCHEME
A graduated payment scheme allows lower instalment payments at the beginning of the loan but this will gradually increase over time. This type of payment scheme will help house buyers to reduce burden of loan repayment for the first few years and allow them to allocate more money for other purposes. Over time, as earnings of house buyers increase, their repayment capabilities will also increase thus allowing higher repayment instalments at a later stage.
A graduated payment scheme is also suitable for a house buyer who wishes to purchase a more expensive house but is restricted by his/her repayment capability during the initial years.
Different financial institutions may have different terms and conditions imposed on prepayments. Check the loan package to see if it allows you the flexibility to make prepayments or extra payments. Flexibility to make repayments and paying interest on a daily rest basis, may help save considerable interest charges. It is also possible to start repayment of the loan during the construction of the house, thus saving more interest charges. What is important is to make prompt monthly repayments.
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source :- Bank Negara Malaysia