Finding the “Right” home loan

Step 2. Finding the “Right” home loan.

Clearly what is “right” is very subjective to the individual, and factors to take into considerations are your age, your employment (employed or self employed; salary or commission), whether the property is for your own occupation or to be rented out, if this is your first home loan, the length of time you plan to keep the loan/property; your spending pattern, your short/medium/long term plans for the property and your future financial needs.

For instance, if you have an irregular income, you may be better off to select a loan with flexible repayment terms to better manage your cash flow.

A loan with free prepayment and “re-draw” facilities will suit people with “spare” cash that they can pay into the loan now to save interest (most loans today calculate interest on a daily basis) without denying themselves the right to re-use the sums that was “prepaid”, at a future date.

If buying land with the view of building on that land, be sure that the Lender you choose is not adverse to providing you with an additional loan for the construction of the property, and at a suitable margin for the construction loan.

For property investors, be careful not to select a loan with a long “lock-in” period or high penalties for early discharge, which may well eat into your profit margin.


Common Mistakes

The most common mistake that first home buyers make is not to anticipate future expenses such as costs associated with having children and elderly parents to look after. Whilst the monthly repayment on the loan may be comfortable now, do make allowance for your overall expenses to go up.

Another grave mistake is not to realize that your loan repayments may go up. Most if not all loan borrowers fail to ask themselves if they may still comfortably afford to make the loan repayments if/when interest rates go up 1%, 2%, 5%? Loans with interest rates pegged to Base Lending Rate (BLR) are called floating rate loans which means that as BLR goes up, you will have to pay more towards the loan. Historically, BLR has gone up beyond 12% per annum. In the past, rate hikes have coincided with market downturns and increase in cost of living. Be sure to do your homework here as Lenders will not asses your future financial needs.

If you find that you cannot afford any increases in loan repayments, don’t despair as there are Fixed Rate Loans available in the market usually offered by Islamic Banks and Insurance Companies.

Also, determine how much you deposit you can spare taking into consideration all the costs and fees associated with purchasing a property and taking a housing loan. Once done, decide the margin of finance you want be it 70%, 80% or 90% of the purchase price. Do not forget “ Entry Costs” i.e the fee for the Sales & Purchase Agreement, Loan Agreement Fee, Valuation Fee, Stamp Duties and charges for the Memorandum Of Transfer.[see Acquisition Cost Calculator]

If you are a bit low on cash, you may decide to opt for a loan with Zero Entry Cost (ZEC) where the Lender pays for all or part of the Loan Documentation Fee (lawyer’s fee), Disbursement, Stamp Duty, and Valuation Fee. You will note that these loans attract a higher interest rate.


Insurance Coverage

Finally determine if you wish to have Life Insurance Coverage/Mortgage Reducing Term Assurance ( MRTA) to cover the loan redemption in the event of untimely death of the borrower. This is especially important if the servicing of the loan depends on the joint incomes of all borrowers. Note that not all loan providers make MRTA compulsory although some do offer better rates if the borrower is insured.

A number of Lenders offer loans up to 95% margin on the understanding that the sum equivalent to 5% of the purchase price is utilized to purchase life cover.


Read on:
Making The Application