A mortgage is generally a long term loan primarily for the purpose of building or purchasing a house. For many, this will be the biggest financial investment of their lives, but it need not be the most complicated or stressful.
Before you undertake a mortgage, review your finances and plans to determine whether you can afford such a commitment at that time, It is unwise to rush into a mortgage with little or no savings or with high monthly expenses, because of the costs involved with obtaining mortgage financing. It is unlikely that a bank will lend you 100 per cent of the amount you need to construct your house.
You will be required to demonstrate your ability to adequately meet your mortgage payments. You should therefore factor in such things as the stability of your present job, your medical or other family needs, tuition costs, etc, when determining how large a mortgage to assume.
Ensure that your past and present credit ratings are good. If you are behind on any bank payments, make every effort to bring them up to date before applying for a mortgage. Take a realistic look at what you can afford. Finding the down payment is one thing; maintaining a mortgage along with your other monthly obligations is another matter.
Before your mortgage application is approved, you will need the following:
- Professional appraisal of the prospective property
- If buying a house, a deposit of 30% of the selling price or the appraised value, whichever is lower, OR, if building a house, deposit of 20% of the cost of construction. The value of any land you own may be considered part of this enquiry
- If buying a house, insurance to cover the value of the property, OR, if building a house, coverage during the period of construction and regular insurance after construction
- Life insurance of the principle borrower (s)
- If buying, purchase agreement
- Personal identification
- Proof of citizenship
- If building, DCA-approved plans
- If building, building permit
- If building, quantity surveyors report (i.e construction cost verification)
- Builders contract identifying cost of various stages of construction
- The Application
During the formal loan application process with your bank, you will be required to verify your income, employment, and down-payment funds. You will have to provide additional information such as your age, address, dependents, assets and liabilities, monthly and projected expenses etc., so that your bankers can fully assess your application. At all times, be honest. Your bankers will verify the information you provide, so falsehoods will only hurt your chances of approval. Once all your documents are in order, approval should come within a few days.
There are one-time fees involved in acquiring a mortgage facility. These include:
Down payment: Banks require a deposit of the cost when granting a mortgage.
Legal fees: The bank will register a Charge & Caution over the property for the amount and duration of the loan. These documents represent the security that the bank will hold for the loan. Fees include government stamp duty and lawyer charges. Negotiation Fee: Banks charge a lending or finance fee for granting the mortgage facility. This is usually 1 per cent of the amount borrowed.
Appraisal Fee: This is a fee paid to the professional valuer for the property appraisal.
Interest Rate: Generally ranges from 11 to 12.5% per annum on a reducing balance basis. If you are a non-national, you will be required to obtain an alien land-holding license, which takes approximately six months to obtain. Your attorney will apply for this license on your behalf. You will also be required to pay a 3% non=citizen government tax (3% of the loan value). To grant you the loan, your banker must obtain approval from the Ministry of Finance on your behalf.
If you have exhausted every source for additional cash and are still short, talk to your banker. It is possible you have other assets you may not have considered. You may also want to consider other options, a less expensive property. Alternate savings set aside for other purposes, or plans postponed for a year or two.
Once your loan is approved, the bank will issue you a commitment letter stating the terms and conditions of the facility. If you accept, the bank can then proceed to register the Charge & Caution over your unencumbered freehold property.
Insurance: For the duration of the mortgage, you will be required to maintain insurance coverage up to the value of the property.
Life Insurance: (required by some banks) This is additional security so that, in the event of your death, the total amount due on your loan will be repaid by the insurance company.
Salary Assignment/Deduction: Written authorization so that your employer can deduct your monthly payments from your salary or remit your salary directly to the bank.
Repayments: You will be given a maximum of 25 years to repay your mortgage facility. Monthly repayment of your mortgage should not exceed one third of your gross salary. Your total debt savings (i.e. your mortgage payments, other debts, and obligations) should not exceed 40% of your income.
You will be expected to repay the principle and interest monthly to your bank, with payments commencing one month after draw down of the loan facility. If building, only the interest payment will be required during construction. It is important that you make your full payments on time each month to keep your loan in good standing. Late payments result in your paying more in interest over the life of the mortgage.
Take advantage of all your banks prepayment options by settling your mortgage earlier than indicated in your mortgage agreement. This will significantly reduce the amount of interest you pay overall. Should any unforeseen change in your circumstances affect your repayment schedule, you should immediately advise your bankers. Most lenders will review your financial position to determine what, if anything, can be done to keep your mortgage in good standing until it can be regularized.
Cost Overruns: Always try to avoid changes to your original architectural plan once construction begins, as this can result in significant and undesirable extra costs. Although buying or building a house is always a challenge, you will find that banks are happy and ready to assist you in making the most appropriate decisions. In the final analysis, you will have much to show for your monthly payments; you will finally own your piece of the rock!