Newcomers to the world of property financing are often worried and scared about making large financial decisions as it involves a large amount of their savings and earnings. One wrong move could land them in deep financial trouble or deplete their earnings and income. Therefore it is best to take some precautions before launching into something as huge as taking out a loan that you would probably spend the rest of your working life paying for.
Deciding how much to pay per month
Generally, experts suggest that your monthly instalment should not exceed one-third of your net income or household income per month. This one third rule includes all your loans including car loan and personal loans, and not just the housing loan instalment.
Margin of financing
The margin of finance means how much of the total costs you can afford to borrow. Usually home or property buyers put a 10% to 20% down payment and then borrow the rest of the 90% or 80%. Many people, especially young adults face issues when saving up to pay down payments and often get help from older relatives like parents. The margin of finance also depends on your standing with the bank and other banks. If you have many loans already being borne, banks can check through credit reporting agencies like CTOS and may offer you a lower margin of finance.
Fixed or Flexible?
Most banks nowadays offer two types of loans, either fixed or flexible rates. A fixed rate means you pay a fixed amount of instalment every month. Fixed instalments also have fixed interest rates and allows you better stability and a better chance to plan your monthly expenditure as everything is predictable.
Flexible loan rates is a system whereby you are allowed to pay a minimum amount or more each month. The more you pay, the excess will be channelled to an associated current account. The more savings you have in that current account, the lower the interest rates will be.
Traditionally and usually, banks will give you up to 90% financing on your property. However, this means you have to prepare at least 10% of the total property value by yourself. Developers usually require 2-3% booking fee or earnest fee and upon signing the sales and purchase agreement, you will be required to spend an additional 7-8% price.
Following this, you will be given a 3 month period to settle the balance of the purchase price or secure proof of financing. Alternatively, you can be given an extension but this is subject to interest on top of the amount of balance you need to pay.
Upon obtaining a loan, you will also be required to purchase either a Mortgage Reducing Term Assurance (MRTA) or Mortgage Reducing Term Takaful (MRTT) which is a one off premium you pay for insurance should anything happen to the borrower, in which case the insurance will settle the loan in full. The premium paid will be calculated based or the age of the borrower. Naturally, premiums will be higher if the borrower is older. Other factors that will determine the rate of the premium includes the loan tenure, interest rates and loan amount.
Lock in Period
Most banks will define a lock in period for your loan which is the period whereby you can be penalized for paying back your loan in full before the end of the tenure. A general advice is to choose a loan with the shortest Lock in period and the lowest penalty.
Some banks are kind enough not to penalize you if you can give them a prior notice beforehand that you wish to settle your loan earlier than expected.
The entire process of buying a house requires several small but essential expenditures as well. This includes legal fees, stamp duty, bank processing fees and others. You would also have to factor in utility deposits for your property to start water, electricity and phone services. Not to mention Internet or satellite TV.