Housing loan documents

A signature serves as a universally recognised symbol of proof of an agreement and seals the deal in many agreements and contracts and makes it legally binding.

One should scrutinise loan documents carefully before signing them. The terms in housing loan documents are usually standardised by financial institutions.

The terms may vary by the letter of offer which is tailored to the prospective borrower’s circumstances and capabilities on the repayment of the loan.

With the idiom, “the devil is in the details” in mind, one would certainly want to avoid being taken by surprise by certain terms and conditions that might have been missed. 

FIRST.

Type of Loan.

There is a wide variety of loans offered by financial institutions. Each type of loan is unique. These include overdrafts, deferred payment, term loans, flexi loans, Islamic financing, interest only loan, etc. The borrower must understand the features of each type of loan from the bankers before choosing the one that best suits them.

SECOND.

Loan Amount.

Apart from financing for the purchase price of a house, the borrower may request the financial institution to finance other costs that will be incurred by the housing loan facility such as the Mortgage Reducing Term Assurance (MRTA) or the Mortgage Reducing Term Takaful (MRTT), valuation fees and legal costs.  

MRTA and MRTT is a reducing term life insurance which protects the borrowers financially in the event of a death or total permanent disability.  Most of the financial institutions require the borrowers to subscribe to the MRTA or MRTT for their loan.  The borrower may ease their financing burden of having to pay for upfront costs getting financing of the said costs in the loan amount. However, this additional loan amount will increase the amount of the monthly instalment.

THIRD.

Interest Rate.

It needs to be considered that the rate of interest per annum quoted by the financial institution from time to time differs according to present circumstances and will be reflected in the letter of offer. Different financial institutions also provide different Effective Lending Rates (ELR) subject to revision which has been updated recently and can be accessed at the BNM website.

According to the BNM Guide to Consumer on Reference Rate, the borrowers should compare and contrast ELRs offered by different financial institutions, ask for a Product Disclosure Sheet for the best ELR suited, enquire about the factors which could affect the Base Rate (BR) from the financial institution, observe the monthly repayment amount and assess further capabilities of the loan’s affordability to equip the borrower to deal with the fluctuation rates periodically.

FOURTH.

Length of Loan.

Housing loan periods can range up to 35 years. It can also depend on the borrower’s age, reaching up to 65 years of age (or any other age as determined by the financial institution). However, longer loan tenures will usually be given to younger borrowers with a good credit profile. The length of loan also determines the amount that needs to be paid monthly as longer loans for the same amount of monies borrowed requires less servicing monthly. 

FIFTH.

Payment of Loan.

One shouldn’t burden themselves too much and bite off more than they could chew in financing their loans. Instalment amounts should be kept in check so that instances of increment are kept in check. The amount spent per month on financing loans should not eat away too much into the funds needed for the cost of living.

SIXTH.

Lock-in Period.

Financial institutions will set a ‘lock-in period’, whereby the borrowers are not allowed to settle the loan repayment in full prior to the deadline period otherwise, an earlier exit penalty will be imposed.  Besides the duration of the lock-in period, the commencement date of the lock-in period also plays an important role especially for the financing of under-construction houses.  

The common commencement date could be from the date of first loan disbursement or full loan disbursement.  For instance, if the commencement date of the lock-in period is from the date of the full loan disbursement, the duration of the lock-in period for the financing for a completed house is effectively shorter than financing for an under-construction house as the latter will take 2 to 3 years to disburse the loan fully. Therefore, the borrower should be aware of the lock-in period time, the start date of the lock-in period, as well as the rate of the exit penalty. 

SEVENTH.

Type of Security Document.

For residential properties, it can either come with its title or without it. The security documents that concerns properties with a title are the charging instrument in Form 16A, Charge Annexure, and Facility Agreement. Properties that do not have its own title yet require the Deed of Assignment, Power of Attorney, and the Facility Agreement as security documents.

In certain circumstances, if the financial institution is under the impression that the borrower’s financial background or records are not strong enough, additional security may be required. The additional security could be in the form of a guarantor, an assignment of rental proceeds, a charge over the fixed deposit, etc.

EIGHTH.

Events of a Default.

The ‘events of default’ clause in a loan agreement stipulates that events trigger the financial institution’s exercising rights in the loan agreement, such as demanding for the full repayment of the loan amount.   Financial institutions tend to have very broad “events of default” clauses to protect their interest in instances which are in the opinion of the financial institution may imperil, delay or prevent the borrower or the security party from performing its obligations or jeopardise the financial institution’s interest.

NINTH.

Default Interest Rate.

In the event of a default, the prescribed default interest rate is to be applied on an overdue amount. This additional interest rate is applied on top of the Base Rate which is higher than the ELR.

TENTH.

The Right of The Financial Institution on Default.

In the event of a default, the financial institution could immediately suspend the utilisation of the loan to prevent further disbursement. The amount owed by the borrower is immediately payable upon the Financial institution’s demand and they can impose a default interest on the amount owed and due.  

The financial institution shall exercise the rights as attorney of the borrower and/or security party to deal with the property in the borrower’s and/or security party’s name and on their behalf.

Thus, it is important to examine the terms and conditions in the housing loan documents. Borrowers should be clear on what they are bound by. With due diligence, one could almost certainly avoid any unpleasantries and disagreements that could further complicate matters.

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