Introduction
Buying a house is an exciting event it is the dream of everyone of us.
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 pages will give you information about various issues on
financing fees that may include in 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.
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Buying a House
Buying a house is a major step, so it planning is an important and the
first step. If you are buying a property under development (new
property) , you should
check the background of the developer. You should ensure that the
developer:
- Has a valid license 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 license
and permit. You can also refer to the Ministry of Housing and Local
Government for clarification. A developer with a good track
record reduces the risk of the project being abandoned. |
What type of property that can I Afford?
Before you commit to purchase a property, you should first think off
your budget to determine how much you can afford and the ceiling
price on any property you 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.
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 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.
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EPF Savings
You could also withdraw from your Account 2 to make the initial down
payment. For further enquiry you can contact your nearest EPF office to inquire
for your
withdrawal eligibility. |
Select 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. Other consideration may include:
- How professional is the financial institution in dealing with
customers and loan package?
- Does it offer quality and friendly service in terms of efficiency and
reliability?
- What are the charges may 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
Basic documents before the financial
institution that you needs for processing your loan application are:
- 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 or you may ask a real estate agent recommend for
you. 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:
* Remark : Type of charges and the amount charged might change from time
to time. 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:
- 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. |
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
- 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
- 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:
- 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. |
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:
RIGHTS
- 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
- 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
DUTIES
- 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
- 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. |
Real Estate Agent Service Charges
Real Estate agent normally will charge certain amount of introductory
commissions base on the value of the property that you purchase. But
this amount rate is all depend on the location and policy of the real
estate company.
In Penang there is
2 common cases of real estate agent services charge: -
1% of the
property unit value is charge to both buyer and seller.
2% of the property unit from the owner.
* This rate is only meant for property that price range is from 0 -
RM150 K. Commission rate will increase as the property price increase. |
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