Trust you are all well. Apologies for posting an article after so long.
It’s been nearly a year since we purchased and moved into a house in Highlands. Since we did not win any lottery, we had to go for a loan to finance the purchase. This post will provide some highlights about the process and the hassle involved but the important thing is that, at the end of the day, the loan gets approved so that you can fulfill your dream…
I just hope that this page will be resourceful and useful to anyone looking for information about the topic. Procedures will surely differ in other banks or financial institutions but at least, this post can give you an overview of the process. Now, get ready for a loooooonnngggg post!
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Step 1 : Know what you want
Before going forward with the new project, you need to know what you want.
Some options are
- Buy a land and build a house
Usually takes more time than anything else and most of the time, it is a really PITA. But at the end, you get exactly what you dreamed of. And of course, you can modify your house design to cater for your current and future needs. If you are buying a land in a “morcellement”, you normally get ready made access to electricity, water, telephone, internet and sometimes sewage facilities.
- Buy an existing house on a private land
Less time consuming, you can get a ready-made house (either new or used). You can then tweak things according to your taste, except the existing house design. The good thing is that you can do extension works afterwards if you need to make the house bigger.
- Buy a flat
Usually, flats can be readily available for purchase or can be purchased while the construction works are planned to begin or in progress. Flats can be small or huge, depending on needs. Sometimes, people buy a small flat close to offices for easy of access while having a house somewhere else.
- Buy a duplex villa unit in a residential complex
Most duplex villas I came across are rather small in size, despite having multiple rooms. They are relatively cheaper than individual houses.
- Buy a villa unit in a residential complex
Same as above, except that you pay more to get an individual house for yourself
If you are buying a flat or a ready made house in a residential complex, please make sure that you think well, especially in terms of family expansion. These type of properties normally have contract agreements and you can’t do any expansion works. Sometimes, you can’t even change the color of your outdoor walls. Also, you usually need to pay a monthly “syndic” fees for the maintenance works, security and welfare of the residential complex or the building.
Step 2a : Know how much you are eligible
What are current monthly expenses? What are your current loan commitments? How much money can you save if you review your expenses? How much money can you invest in a new loan?
These are questions that you need to ask yourself. Sit down, write down your recurring monthly expenses. Calculate the amount of money left. If you are married, you can jointly take a loan with your spouse. Your monthly repayment capabilities will be higher along with more chances of getting a bigger loan.
Next, visit your bank along with your 3 most recent payslips, your National ID card(s), your birth certificate(s) and your marriage certificate (where applicable). The bank can advise you accordingly and give you an estimate of the amount of loan you are (jointly) eligible. From here, you will know how much money you can invest in a new property purchase and also, a rough estimate of the monthly repayment for that loan.
Step 2b : Don’t exaggerate on the loan amount
If you are eligible for a Rs 5 Million rupees loan, think well about the amount you gonna take and the risks associated. On top of the monthly repayment loan premium, you will also need to cater for
- The monthly premium of a life insurance policy covering that loan. We will get to that later…
- Any additional and unforeseen expenses for the family
- Any family expansion plans
- Kids education
Of course, you gonna get promoted to a better position in some years most probably but remember, better be on the safe side.
People will always advise you to go for short loan repayment periods whereby you need to sacrifice a lot more just to avoid big interests amount. I don’t agree to that as if you don’t have any money at the end of the month, then you are not living a life. You are working hard to earn some money and you should ensure that you can at least enjoy your life as well as provide a shelter for your family. So, avoid getting over-indebtedness and take big risks. Play safe.
Step 3 : Your employer
Bank or other financial institutions will probably require you to ask your employer to sign a form (SBM calls this the ISP Form) whereby the employer commits to credit your salary in your account at that bank.
Step 4 : The PIN
The Parcel Identification Number (PIN) is a unique ID assigned to a plot of land and used by land surveyors etc. The notary will normally do the necessary to apply for a PIN at the Ministry of Housing and Lands and it usually costs Rs2500.
Step 5 : The sale of deed
A draft of the sale of deed ( Title deed ) is first prepared by a notary of your choice or that of the current property owner. The notary will need ID cards, birth and marriage certificates
It is common practice to put a piece of land as guarantee when you take a loan. Consequently, the financial institution will put a “lien” on that property. It is good to know that you can’t sell anything which has a “lien” on it, unless there’s an official letter giving clearance to sell that property and consequently settle any outstanding amount.
Step 6 : Loan application
As procedures can vary from banks and other financial institutions, the documents might vary and include :
- 3 most recent payslips
- ID Cards, birth and marriage certificates
- Title Deed
- Site Plan
- Location Plan
- Proof of address
Step 7 : The property evaluation by the bank
Once you submit your loan application, the bank will assign a private evaluation officer to have a look at the property you are planning to acquire. This process ensures that the property is correctly evaluated and loan taken accordingly. I think that this also forms part of the risk assessment in case you fail to pay back your loan
Step 8 : Life insurance policy and medical tests
Nowadays, most banks require a life insurance policy to secure the loan in the eventuality that some unforeseen situations happen. This can be death or total / partial disability. In these cases, the life policy will pay back any remaining amount of your loan and the difference to your family. This guarantees that the house won’t be seized, causing any hassle or loss to your family.
There are 2 types of life insurances applicable :
- The normal one has higher monthly premium but at the end of the loan contract period, you are entitled to get the insurance policy amount (+ interests etc) back. So, it works, just like a life policy. Read one of my old posts for more information : http://www.yashvinblogs.com/life-insurance/
- DTA (Decreasing Term Amount) insurance costs less monthly in the long run as it depends on the amount of loan due. But at the end of the loan period, you won’t be entitled to any amount that you contributed.
The insurance company will study your application and profile. You might be required to do medical tests at their own expense such as blood test, visit to a doctor, ECG (Heart) or even a stress test. This medical set of assessments allow the insurance company to evaluate your health and risks associated because if ever, you fall ill or worst later on, they will need to pay back your loan with their money. The medical results also allow them to set a monthly premium.
Step 9 : Loan approval
Once all docs have been submitted, the loan is sent for approval. Normally, this is discussed in a board / loan committee meeting and depending on your (repayment) profile, your loan can be fully or partly sanctioned. The loan interest rate is also finalized before this is communicated to you.
At this point of time, they may also run checks on your profile (No, not your Facebook profile!) but instead on your job and account history. They need to make sure that they are not taking big risks by lending you money. Important to know that according to the law (I think), a person (or a couple) can have a maximum of 40% of the monthly (combined) salary income to repay loans.
Step 10 : Final sale of deed
Once loan is approved, the notary will be informed accordingly so that he can prepare the final sale of deed.
Step 11 : Bank approval for final sale of deed
This sale of deed goes back to the bank for approval and signature of related documents
Step 12 : Loan disbursed
The loan is then disbursed into your personal account or directly to the notary or through a cheque.
Step 13 : Signature of final sale of deed
The long awaited day!
Both seller and buyer normally meet at the notary’s office to officially sign the sale of deed and proceed to the payment of the sale, charges and other fees. Once this document is signed, you can consider yourself as officially the new owner of the property.
Congratulations! You can now update your official address everywhere, including on Facebook 🙂
Now, the notary will register the sale and inform the bank once everything is finalized. After some days, both buyer and seller can collect the signed and registered sale of deed.
Post-sale 1 : Taxes, commission and fees
The notary taking care of the transaction will normally inform you of his fees and any other charges (such as tax) that you need to pay as a buyer. The seller will also be informed of the fees he needs to pay on his side. The notary will also ensure that the charges are paid to the corresponding accounts (including to the authorities). Each notary have their own fees, hence the need to ask them before dealing with the transaction.
If you are buying a property through an agency or a (registered) intermediary (“courtier”), you should know that they charge about 2% of the whole transaction amount. So, if you are buying a land for Rs 2 millions, you need to pay them Rs 40, 000 as fees. (probably add VAT to that too). Important to note that this fee is not included in your loan amount and is paid directly to the agency or intermediary, not through the notary
The bank will also charge you for the loan papers and other associated charges. This will also vary from bank to bank and if you are lucky enough, you might be applying for a loan during promotional sales period whereby some charges are sometimes waived off.
As a seller, you have to pay 5% tax to the government for the transaction. So, when selling any property, make sure than you take than 5% into account as you never gonna get that money. The notary will automatically do the necessary to deduct that amount.
Now, a buyer also needs to pay 5% tax to the government, unless that the buyer does not have any other property on his/her name, including property obtained through heritage. In this case, the buyer is considered a first-time buyer and the 5% tax is waived off. If you are purchasing the property jointly with your spouse, the buyer 5% tax wave off applies if both persons do not have any other property on their names.
Post-sale 2 : MRA exemption
Also good to know that you are entitled to deduct any home loan interest in your tax returns if you have no other property on your name.
Again, if you took a joint-loan (with your spouse), your spouse should not have any other property too.
Post-sale 3 : Property evaluation by Ministry officers
Once the sale is completed, officers from some government evaluation office will get in touch with you after some time. They will request a site visit to see if the property was under-evaluated in order to evade the tax paid to the government.
How long does the whole process take?
Just for indicative purposes, I got in touch with the bank around 10th January with the necessary payslips to get an idea of the amount of loan we are entitled as a couple. Once the property (land and house) has been identified, I started to gather the necessary documents as from the 15th January. Loan application was signed in February. Loan was approved some weeks later, after which loan was disbursed into my bank account.
Sale papers was signed on 22nd March, for my birthday.
I hope to write more often now. Any topic suggestions are the most welcomed. I might be writing on my wifi-enabled light switches next time, so keep tuned!