AN OVERVIEW OF HOUSING FINANCE

Unless you are extremely wealthy, you will need to avail of a housing loan to assist you in the purchase of your property. Given that this will most likely be one of the most significant financial decisions that you will make, it is vital that you exercise care and caution in what you do. On this page we have set out a few steps and guidelines in obtaining a housing loan. This is meant to serve as a general guide only and you should be aware that different lenders have different criteria when extending loans. The best way to determine exactly what is available to you is to speak to banks and/or financial institutions or to avail of the assistance of one of the many housing finance professionals who make their services available for a fee.

Determine how much you can borrow
As a general rule of thumb, lenders are willing to extend loans equal to 60% to 85% of the value of the property, subject to various considerations including the age of the property, it's condition and of course, your repayment ability. Within these parameters, a loan equal to 2 to 3 times your annual household income is common. Bear in mind that some lenders will base their finance on the value of the property only, and any additional costs you incur, such as legal fees, stamp duty, registration charges etc, will have to be borne by you.

Determine your repayment ability
A housing loan is repaid by Equal Monthly Installments (EMI) and lenders normally look to ensure that the EMI of your loan will not exceed 50% of your monthly household income. Your EMI must be met on time to avoid the risk of losing your home so be very honest with yourself about your repayment ability. You will no doubt have to make sacrifices in some areas to accommodate your loan repayment obligations, so be clear about what changes in lifestyle you should expect. This is not a time for daydreaming. Be realistic and honest with yourself.

Interest rates vary
The amount and period of a loan will have a bearing on the interest rate you pay. Interest rates also vary by lender, so do your research and find the best available deal. Some lenders offer fixed or floating rate mortgages. Fixed rate mortgages give you peace of mind when interest rates rise, but you lose out if they fall. Speak to lending institutions or finance professionals about the pros and cons of the different options available to you.

Up-front charges
Some lenders impose a processing fee, while others may have an administrative charge for processing your loan application. Some lenders will require you to bear the cost of legal appraisal or other ancillary charges. These on time charges may be collected up front, in which case you will need to have the funds readily available. Some lenders will deduct these sums from the loan amount, in which case you will need to "top up" the loan to ensure that you are able to make full payment for the property. Either way, you are paying these charges, so find out what they are and compare offers from different lenders.

Commitment Fees and Prepayment Penalty
A lender will charge you a commitment fee on your loan if you agree to borrow from them and then you do not utilise the loan for an extended period of time. The actual time before a commitment fee becomes applicable will vary by lender. Lenders will also charge you a prepayment penalty if you prepay all or a part of the loan, because prepayment impairs the ability of a lending institution to plan it's finances and this in turn creates a cost for them.

Insurance
Some lenders will require you to take out an insurance policy on the property, or may require you to maintain a certain minimum amount of life insurance coverage for the tenor of the loan, at your own expense. You may be asked to assign the benefits of these policies to the lending company, or they may ask to be named as co-beneficiaries on the policies. This is done by a lender to ensure that if something untoward were to happen to the property or the borrower, the lending company would have adequate security to cover their financial exposure. Any surplus proceeds from any insurance claim that has been applied towards repaying the loan will go back to the insured party/beneficiary.

Choose a lender
After carefully considering all the different options available to you, you will finally need to decide on which company to borrow from. Housing finance is a competitive market and many lenders will offer "sweeteners" to try and make their loans more attractive. While you shouldn't base your borrowing decision on freebies alone, be aware that there are attractive deals on offer.