A note of caution on housing loans

Buying a home can lead to bankruptcy if you are not prepared

25% of the defaulters are said to be on car and housing loans. At an average of 14,000 new cases per year, 3,500 will be losing their cars or houses. If you have noticed, the number of properties advertised for auction in the local papers is rising as well.

According to the Glossary provided in the Bank Negara’s website, non-performing loans refer to the outstanding amount of loans (principle and interest) classified as non-performing when principle or interest is six months or more in arrears.

A rough estimate on the number of purchasers according to the property type and the non-performing loans amount in the Mar 2007 is 114,500.

Can you even afford a house right now?

Assuming you can afford a house, how much can you afford? These are important questions that many people do not research, focusing on what their mortgage payments will be, ignoring other monthly payments. This oversight puts many people down the wrong path to bad debt.

For example, your monthly expenditures will be more than just the housing loan, there will also be all kinds of insurance, utilities & phone bills, contributions to maintenance fund, medical bill, groceries, unexpected household/auto repairs, lunch money, and many other obligations. They must all be accounted for in your budget spreadsheet. For many of us the purchase of our house or investment property is the largest financial commitment we will ever make. This makes arranging the most suitable housing loan just as important.

Make sure you know all the costs of entering into the loan and purchasing the property. These costs include conveyancing costs, application fees, valuation and legal fees, mortgage insurance (if necessary) and sometimes extra life insurance premiums.

Some lenders will tell you the advantages of whatever housing loans they are trying to squeeze you into, but rarely will they tell you the disadvantages. Be ready when it happens and things will go your way.

According to an article in a business magazine, the banking system is flushed with RM140 billion liquidity. This explains the increasingly aggressive sales promotions undertaken by financial institutions for the housing industry. Even credit card holders’ recruitment has taken to the shopping malls, hypermarket concourses and popular food stalls.

Whilst we will leave it to our economic gurus to analyse as to whether these are good indicators or not, one thing is for sure; the securing of a housing loan is now a less intimidating effort.

Always look at the total deal, not some dangling carrots in front of your face. Compare the entire housing loan cost of several different lenders to determine which type is best for you.

We would like to discuss some of the lenders’ offers that may not be as attractive as they appear. We will start with the special low interest offered for the first year. Such an offer is usually given during a sales campaign and it usually carries a fixed calendar period with a run-out date.

‘Honeymoon’ start

Thus, even if a house buyer commenced his application process immediately upon the launching of the campaign, by the time the loan is approved and disbursements commenced, the period remaining to enjoy this special low interest rate will certainly be much less than one year.

If he were to start the application process a few months after the start of the campaign, it is likely that he will enjoy the special low rate for only a very short period.

Another point for thought is that due to our unique system of progressive payments to the developers, the mean average of the amount disbursed by the banks during the “first year low interest offer,” is really lower than the loan amount.

Thus any saving on interests is really much less than it seems. And these have all been figured out already by those marketing experts in the banks. A more sincere approach would be to offer the special low interest rate to apply during the progressive payment period and to continue to run for one year after the date when the loan is fully disbursed. Only then can such offers bear some element of sincerity. We believe that anything short of that makes the offer a sales gimmick.

There are other clauses that put house buyers in disadvantaged situations. Some lenders include clauses in the Loan Agreements that give them the absolute rights to alter both the Base Lending Rates and/or the margin of interests.

Doesn’t this in effect nullify their typical attractive sales brochures offer of “BLR plus X % for following years”?

One cannot make a special low interest offer in the sales campaign and then contractually (through the Loan Agreement) creates a clause to allow that special offer interest rate to be invalidated. That would make the special offer a sales gimmick.

Make sure you know all the costs of early discharge of the loan.

One other clause to look out for is on the redemption of the loan. A house buyer may wish to sell the house or perhaps have made enough money and wishes to fully settle the loan for whatever reasons.

This is where the conditions for full settlement differ from one institution to another. Think long term. Do not be in a disadvantaged position when the day comes and you wish to redeem the loan.

When one takes a loan, one spends a much longer period servicing the loan beyond the first year or even the second and the third year. So do not be taken in by the very attractive offers during the honeymoon year/s of the tenure of your loan.

Remember, the remaining of the 25 years is more important. Do not go for short-term gains only to lose out heavily on the long remaining years.

We would advise house buyers to look beyond the first year of so-called low interest when shopping for housing loans. With the stiff competition going on among the various lenders today, one should seriously take some trouble to shop around and to scrutinise each and every offer before commencing the application process. Talk to your banker, lawyer friends or seek advice at National House Buyers Association.

We wish to stress that once the application process starts, it is unlikely that one will have time for any change of mind. By the time the formal letter of offer is received and if one does not agree with any of the conditions within, there is usually no more time to reapply to another financier without incurring the late payment penalty to the developer.

One really has to scrutinise the fine prints before making a decision as to which financial institution to apply to for a loan. Housing developers usually start charging interests as soon as the date for payment is reached (with perhaps a 2 weeks’ grace at best). Hence if by then one still has not secured a loan and the banks are not ready to start disbursement, one starts to incur interests for nothing.

So scout around and study each and every scheme carefully before you even apply. There are subtle but material difference between the various schemes and offers among the lenders.

Talk to the lenders concerned. Seek your banker, accountant, financial planners and lawyer friends’ opinions. Do not be taken in by the short term attractions. Think long term. Look beyond the first 3 years.

Think about the clauses and the interest rates during the remaining long 25 years that you will be grappling with that loan.

Where to go for help

If you have a problem managing your finances and wants badly to keep your home, the Bank Negara provides counseling and advice on financial management as well as a Debt Management Programme and Financial Education through the Credit Counseling and Debt Management Agency.

Credit Counseling and Debt Management Agency

Kuala Lumpur Headquarters

Level 8, Maju Junction Mall

1001, Jalan Sultan Ismail

50250 Kuala Lumpur

Toll Free Number : 1800 88 2575

General Line : 03-2698 8575

Fax Number : 03-2698 1575

Email to : enquiry @ akpk.org.my

Website: http://www.akpk.org.my/

Most of the complaints receives from house buyers are on late payment interest, due to end-financiers disbursing loans late or banks slow in approving loans and communication problems. For disputes with banks who are members of the Financial Mediation Bureau, which is an independent body, contact them at this address:

The Financial Mediation Bureau

Level 25 Dataran Kewangan Darul Takaful

No. 4, Jalan Sultan Sulaiman

50000 Kuala Lumpur.

Telephone : 03-22722811

Fax : 03-22745752

Website: http://www.fmb.org.my/