Introduction
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 information in the following pages will give 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:
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- 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
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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.
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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 instalments for your house, car and other payments
should not exceed 1/3 of your gross monthly household income.
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Your
source of funding can be all or any combination
of the following:
- Savings
- Withdrawal
from Employee Provident Fund (EPF)
account
- Loan
facility from a financial institution
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Savings
You should have sufficient personal savings to pay for the downpayment
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.
EPF Savings
You could also withdraw from your Account 2 to make the initial downpayment.
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 consider factors other than just interest
rates. Below are some of the factors you should consider:
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- 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
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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.
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Loan
Applications: Documents Required
You need to provide the following basic documents before the financial
institution can process your loan application: |
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A
photocopy of identity card or passport
-
Your
latest 3 months' salary slip
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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
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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
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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
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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 timeframe for the completion of this legal
process should not exceed 6 months.
Fees and Charges
There are also related costs such as professional fees and government
charges that you would have to pay. Below are some of the common fees
and charges you would expect to incur:
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| Sales & Purchase
Agreement/Tranfer/Financing |
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First
RM150,000 |
1%
(minimum fees of RM300) |
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Next RM850,000 |
0.7% |
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Next RM2,000,000 |
0.6% |
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Next RM2,000,000 |
0.5% |
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Next RM2,500,000 |
0.4% |
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| Excess
RM7,500,000 negotiable (not exceeding 0.4%) |
Please
note that the type of charges and the amount
charged might change in the future. You
should meet with your financial institution's
loan officer for further advice and discussion
regarding any questions that you may have
concerning the type of fees and legal services.
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Assesing
your Loan Repayment Capacity
A common criterion is that your monthly loan instalment 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:
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- Type of property
- Location of property
- Age of the borrower
- Income of the borrower
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Loan
Tenure
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.
Loan Features
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.
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| Common
Housing Loan Packages Offered by Financial
Institutions |
Term
Loan
- 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
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Overdraft
facility
- 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
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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
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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.
Prepayment
Flexibility
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 prepayments 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.
Partial Prepayment of the Outstanding Loan
Many borrowers find it useful to shorten the loan tenure by making
partial prepayments with surplus savings or annual bonus. Partial
prepayments can be in any amount. However, some financial institutions
may impose restrictions on the amount to be pre-paid while others
may impose a penalty. It is extremely effective in reducing the interest
charges you would have to pay if prepayments are made during the
early years.
Early Termination Penalty
Financial institutions may impose a penalty on full repayment of
loan. Generally, the penalty imposed can either be a flat rate or
an 'x' number of months' of interest (e.g. 1 month's interest). This
is because when a loan is granted for a certain term, the financial
institution would expect the loan to be repaid over the period agreed
and has planned their cash flow on this basis. An early termination
of the loan would therefore disrupt the financial institution's cash
flow planning. As such, some financial institutions do not charge
a penalty if sufficient notice is given (as stated in the terms and
conditions of the loan) or if the settlement is made after the required
minimum period to maintain the loan with the financial institution
has passed.
Documentation
The primary documentation involved in applying for a housing loan
is the loan agreement. A Loan Agreement is a contract signed between
the buyer and the financial institution.
A Loan Agreement contains major provisions such as the terms of the
loan, principal sum of the loan, interest rates, default interest
rate, penalty charges and repayment terms. It also sets out the duties
of borrower and the lender and in the event of default, the rights
and remedies of each party.
The other common legal documents that you may need to sign are Deed
of Assignments, Charge documents and Power of Attorney.
Remember that throughout the tenure of the loan, your property is
charged to the financial institution (i.e. the financial institution
has a claim over your property). Whether you are buying a completed
property or a property under construction, you should obtain an explanation
from the attending lawyer on the major clauses of the agreement and
the implications of each clause.
Valuation Report
This documentation may be required if you purchase a fully completed
property from a houseowner. The financial institution will appoint
a property valuer from its panel of valuers to appraise the property.
The valuation fee for this service starts from a few hundred ringgit
upwards, depending on the value of the property and you will be charged
for this service.
Insurance
It is extremely important to take insurance coverage when you purchase
a house. The most important factor is that it gives you and your
loved ones peace of mind, in the form of financial security if an
unfortunate event should occur.
There are two important insurances to consider:
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The
House Owner/Fire Insurance policy
This policy provides coverage for your property against natural
disasters such as flood, fire, riot, strike and malicious damage.
For properties with strata titles such as apartments or condominiums,
you need not buy the insurance because the Management Corporation
(MC) would have taken up insurance on the entire building. You
should ensure that you obtain the sub-certificate of the Master
Policy issued by the insurance company from the MC and present
it to the financial institution. This is necessary so that the
financial institution is aware that the property has been insured
and will not buy another fire insurance on your property. In such
a case, you will be required to assign your rights under the policy
to the financial institution.
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The
Mortgage Life Assurance or MRTA
This type of policy provides for full settlement of the outstanding
balance of the housing loan with the financial institution, in
the event of total permanent disability or death of the borrower.
Premiums can usually be included in the loan amount, and the repayment
period of the premium is usually spread over the loan tenure. The
premium is only incurred once. There are no monthly or yearly premiums
to be paid. In the event of early termination of housing loan,
you will generally have the option to request for a refund of the
premium for the balance of the unexpired period or to continue
the insurance coverage.
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Financial
institutions have their own panel of insurers
and most of them can arrange insurance
on your behalf with the annual premium
charged to your loan account.
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Loan
Disbursement
The financial institution disburses (pays out) the loan once it has
received advice from its lawyer that the legal process has been completed
and the loan documents are in order. At this time you will be informed
of the date and amount of the first instalment you have to make.
Rights and Duties of the Borrower and Financial
Institution
Both borrower and financial institution have certain rights and duties
during the course of the loan. Some of the more important ones include:
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| RIGHTS |
1)Borrower
- Right to have access
to all information that would affect
your borrowing decision
- Right to be treated
professionally, courteously and without
prejudice
- Right to be consulted
on changes to the terms and conditions
of your loan
- Right to have accurate
information on a regular basis on your
loan account
- Right to enforce legal
action in the event of a breach of
contract
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2)Financial
Institution
- Right to have full
relevant disclosure of information
on borrower's credit standing
- Right to correct and
truthful information on the borrower
- Right to timely repayment
of interest/ instalments of the loan
- Right to enforce legal
action in the event of default/breach
of contract
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| DUTIES |
1)Borrower
- Duty to read and understand
all terms and conditions of the loan
- Duty to observe the
terms and conditions of the loan at
all times
- Duty to enquire and
get clarification on all aspects of
the loan to their satisfaction
- Duty to make prompt
payment on the fees, charges, interest
and instalment of the loan
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2)Financial
Institution
- Duty to discharge
borrowers' obligations as described
in the loan agreement
- Duty to consult borrowers
on any changes made to the terms and
condition, fees charged and other relevant
information
- Duty to attend to
all queries made by borrower
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A
Loan Officer can provide invaluable assistance,
and clarify issues which you are unsure.
Take the time to discuss your housing loan
questions with a loan officer at length
so that you can choose a loan facility
that best suits your needs.
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