Look before you leap

23/11/2002 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

For many of us, the purchase of a house or investment property is the largest financial commitment we will ever make. More often than not, to finance the purchase, we have to resort to taking a loan, which we spend the better part of our lives paying off.

Thus it is important to know, before we opt for a loan, exactly what is involved, such as the 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 sell you, but rarely will they tell you the disadvantages.

Here are some pointers to guide you in choosing a loan:

1. Can you even afford a house right now?
And, assuming you can afford a house, just how much can you afford to pay for it? These are important questions that many people do not think through as they focus on what their mortgage payments will be, ignoring other monthly payments.

For example, your monthly expenditure will be more than just the housing loan; there will also be all kinds of insurance, utility bills, contributions to maintenance fund, cable TV and other obligations that must be accounted for in your budget spreadsheet.

2. Always look at the total deal, not some dangling carrot in front of your face.

Compare the entire housing loan cost of several different lenders to determine which type is best for you. Some of the lenders’ offers may not be as attractive as they appear. We will start with the special low interest offered for the first year, which we’ll call the “honeymoon start”. Such an offer is usually given during a sales campaign and usually carries a fixed calendar period with a run-out date.

Thus, even if a house buyer commences 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.

Another point for thought is that due to our unique system of progressive payments to 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 savings on interest is really much less than it seems.

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 at a disadvantage. Some lenders include clauses in the loan agreements that give them the absolute right to alter both the base lending rates (BLR) and/or the margin of interest. Doesn’t this in effect nullify their typical attractive sales brochures offer of “BLR plus X per cent for following years”?

They should not make a special low interest offer during the sales campaign and then contractually (through the loan agreement) create a clause to allow that special offer interest rate to be invalidated. That would make the special offer a sales gimmick.

3. 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 wish to fully settle the loan. This is where the conditions for full settlement differ from one institution to another. Think long term. Do not be at a disadvantage when the day comes and you wish to redeem the loan.

When you take a loan, you spend a much longer period servicing the loan beyond the first or even the second and the third year. So do not be taken in by the attractive offers during the honeymoon year/s of the loan tenure. Do not go for short-term gains only to lose out heavily on the long remaining years. Look beyond the first three years. Think about the clauses and the interest rates during the remaining long 25 years that you will be grappling with that loan.

With the stiff competition going on among the various lenders today, you should seriously take the trouble to shop around and to scrutinise each and every offer before commencing the application process. Talk to your banker and lawyer friends.

We wish to stress that once the application process starts, it is unlikely that you will have time to change your mind. By the time the formal letter of offer is received, there is usually no more time to reapply to another financier without incurring the late payment penalty to the developer. Housing developers usually start charging interest as soon as the date for payment is reached (with perhaps two weeks’ grace at best).

Scout around and study each and every scheme carefully before you apply. Buying a home is a very serious investment that must work right on the first try with no mistakes. Do not be impulsive. Patience and planning are the key words.