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:
- 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 instalments for your house, car and other payments should not exceed 1/3 of your gross monthly household income.Your source of funding can be all or any combination of the following:
- Withdrawal from Employee Provident Fund (EPF) account
- Loan facility from a financial institution
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.
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:
- 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 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:
Sales & Purchase Agreement/Tranfer/Financing
- First RM150,000 1% (minimum fees of RM300)
- Next RM850,000 0.7%
- Next RM2,000,000 0.6%
- Next RM2,000,000 0.5%
- Next RM2,500,000 0.4%
- 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.
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 installments. Installment is fixed for period of time, say 30 years
- Installment payment consists of the loan amount plus the interest
- A facility with credit line granted based on predetermined limit
- No fixed monthly installments 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 installment 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 installment 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 installments 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 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.
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.
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.
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:
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.
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.
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.
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:
- 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
- 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
- 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
- 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
- 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.