Tips on property purchasing #2

Posted on 12:21 PM | By Smart Wealth Advisory | In

3.Assesing 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.

4.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

5.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.

Common housing loan packages offered by financial institutions
i. Term Loan
• 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

ii. Overdraft facility
• 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

iii. 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 installments on the term loan portion is required
• Flexibility on the repayment of overdraft portion

6.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 installment is made.

7.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.

8.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.

9.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.

10.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.

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