Opinion: Vital facts you need to know before applying for housing loan

house

By Lanka Property Web

The rising population growth across the world has increased the need for housing day by day. People are either on the lookout for houses within their budget range or are flipping through housing loan scheme pamphlets to build their own. In fact, unlike what most people claim, the demand for property in Sri Lanka is still on the rise despite the pandemic. With repatriation in progress and developers offering discounts, this demand is only expected to continue increasing. This is when you need to consider applying for a housing loan.

Housing loans are a growing facility offered by commercial banks at highly competitive rates. Banks customize their policies, simplify the mortgage loan process, shorten the approval period and even increase the eligible age to apply for these loans. However, it is only when you have to repay this debt that you realize you should have chosen wiser.

With interest rates going down to its lowest rate in 6 years, now is the best time to apply for one. In fact, using a housing loan to invest in real estate is much more profitable than saving money through a fixed deposit.

The average usual 5-year rate for a fixed deposit is 6.5%. However, the ROI on a property increases beyond this with time. According to LankaPropertyWeb’s data, Investing in property would give you 22% of an overall average price increase in the Sri Lankan property market. Whereas Sri Lanka’s overall residential land price increase is 26%. (Q3 2019 – Q3 2020).

But with all the offers and easy payment schemes provided by banks for housing loans, we recommend that you carefully think through your options before selecting one.

Here is a list of some housing loan schemes offered by banks in Sri Lanka and what to consider when selecting one.

  1. Housing loan rates in Sri Lanka and bank charges

Besides the capital amount obtained for a housing loan, banks charge an interest. The rate for it may be on a floating or fixed basis with percentages varying based on the bank.

Floating or Variable housing loan rates fluctuate based on the cash rate and economic state of the country. Because of this, while there is a risk in choosing this interest basis, the rates are usually lesser than a fixed interest rate loan. Certain banks also offer additional facilities like extra repayments, redrawing facilities, etc.

When selecting the ideal loan, compare interest rates between different banks. Visit them in person or research on platforms like LankaPropertyWeb’s housing loan comparison page and decide on the best one for you and use a home loan calculator to find out what your monthly repayments will be.

Make sure that you also consider bank charges. This is because certain banks charge higher additional fees that is more than the actual capital and interest combined. However, since such information may not always be publicized online, it is recommended that you visit the bank in person.

  • Credit score for a housing loan

Your credit score determines your ability to repay a loan. Banks consider this report (CRIB Report) an essential part of gathering information on you. This score fluctuates due to various factors including your credit card history and shows your creditworthiness. To maintain a positive score, you need to be extra cautious of what you sign up for financially, your credit card repayments, etc. The lower the score is, the lesser chances you have of obtaining a loan.

However, now that you can submit a request to your bank or visit the Sri Lanka Credit Information Bureau in person to get your individual credit score, you can easily identify and minimize payments and other costs negatively affecting this score. All you have to do is download the application, forward it to the Bureau in person or through your bank, and the iReport will be mailed to you.

To download the application, click here.

  • Affordability

The amount you can borrow as housing loans differs based on the packages offered by the bank. When selecting a limit for this, consider your affordability and the amount required. Although the repayment period for a home loan can be extended up to 20 years or more, the amount that accumulates towards the end may increase. If there are any deferments throughout the years, the cost you have to bear may increase further.

The minimum salary needed to apply for a loan is Rs.25,000 and the total monthly loan repayment amount should not exceed 40% of the monthly income.

  • Loan period

The loan repayment period offered by banks varies from one to another. While most banks allow you to make payments within 15-20 years, others may extend it up to 25 years. Of course, this depends on the bank. So when you are selecting a bank, consider the repayment period as it has a direct impact on your loan in case of a deferment.

The age of the borrower is another factor reviewed by the bank when approving a housing loan. Generally, the borrowing age for customers is from 18 to 60 years, but some have a limit of 55. Certain other banks also require you to obtain general insurance when signing up for a housing loan. This is to reduce the risk the bank has to bear by extending their funds to you.

  • Different interest rate types

A Variable Interest Rate  loan is a loan where the rate of interest charged on the outstanding balance varies as market interest rates change. The interest charged on a variable interest rate loan is linked to an underlying benchmark or index, such as the Sri Lanka Inter Bank Offered Rate (SLIBOR) and Average Weighted Prime Lending Rate (AWPR). For foreign currency loans, Sterling overnight index average (SONIA) previously known as London InterBank Borrowing Rate (LIBOR) is used. As a result, your installment payments will vary in predetermined intervals.

In Fixed Interest Rate loans, the interest rate charged on the loan will remain fixed for that loan’s entire term regardless of the market rate fluctuations. This will end with your payments being an equivalent over the entire term. Whether a fixed-rate loan is best depends upon the rate of interest in the market when the loan is taken out and during the duration of the loan.

When the loan is fixed for its entire term, it remains at the prevailing market rate of interest. If interest rates are relatively low, but are on the brink of increase, then it’s better to lock your loan at a fixed rate.

Depending on the terms of your agreement, your rate of interest on the new loan will stay the same, albeit interest rates climb to higher levels. If interest rates are on the decline, then it is better to possess a variable rate loan.

Average Weighted Prime Lending Rate (AWPLR) is published weekly by the Central Bank of Sri Lanka based on the information provided by licensed commercial banks regarding lending rate offered to their prime customers during that week. These loans are granted by licensed commercial banks, usually on a short-term basis.

  • Document required to apply for a housing loan
  • Details of income.
  • Title Deeds, Extracts (Paththiru) and approved Survey Plan (drawn within the last 10 years).
  • Nonvesting, Ownership, Street Line and Building Line certificates from local authority.
  • Tax receipts for the last quarter and Assessment Certificate (Waripanam) from local authority.
  • Bill of Quantities (BoQ) (if building a house).
  • Approved condominium plan, tripartite agreement with power of attorney favouring the bank (if buying a condominium).
  • Copy of NIC (National Identity Card) or Passport.
  • Last 3 months’ salary slips by the company.
  • Letter from your employer confirming your particulars.
  • Statements of bank account (s) to which the salary was remitted during the last 3 months.
  • Details of any other loans that you currently have.
  •  Marriage Certificate (for joint applicants)
  • Repayment Method

Many banks offer their borrowers two options to consider when paying loan installments. They are the equated balance and reducing balance methods.

In the Equated Balance method, which is also known as the Equated Monthly Installment (EMI), the borrower pays the same amount of monthly rental throughout the loan term. This is the sum of the principal loan amount and the interest on the principal, which is then divided by the number of years. This provides the borrowers an understanding to budget their finances as to how much money they will need to pay each month for their loan.

In the Reducing Balance method, the loan principal is divided by the loan term and interest is calculated on the remaining loan after reducing the monthly principal payment. Here the borrower has to pay a higher monthly installment at the earlier repayment periods than the equated balance method. However, the monthly installment will reduce in the latter part of the loan term. If you sum up the total monthly installment payments (principal + capital) in the reducing balance method, it is generally lower than the equated balance total installment payments.

Here are a few other commonly asked questions on housing loans.

  • What is Remortgaging?

A re-mortgage is when you switch from your current mortgage to another product. This is where you will replace your existing financial agreement on the property, either with your existing lender or a different provider. In most of the cases, a re-mortgage is done to get to a better rate or to get additional funds.

But there can be drawbacks in remortgaging. Extending your loans to an extended time frame may increase the overall cost of the facilities. When a property is used as collateral, it can be repossessed if you cannot keep up with the loan commitments. There can be fees attached to re-mortgages by the lender which may counter any of the benefits you might receive from negotiating a lower rate on your loan. Further, the remortgage process may take a long period to complete.

People also choose to remortgage property with the intention of releasing some equity that they own. Home owners borrow funds against their property by remortgaging and claim a lump sum at once. These are then used on home improvements that increase the property’s value further. This is known as remortgaging to release equity.

  • What is Loan against property?

A loan against a property is where a borrower obtains a loan from the bank by keeping his or her commercial/residential property as a collateral. This is also called a secured loan because the security of this loan is the property that is owned by the person. The interest charged on this type of loan is offered on a fixed and variable basis ranging from 8.5% to 12.5% with other conditions differing based on the bank.

  1. Can expats and foreigners apply for a loan?

Local commercial banks only allow housing loans for Sri Lankans, expat Sri Lankans, and Sri Lankan dual citizens.

Non-Sri Lankan foreigners can’t apply or get a housing loan from a local commercial bank.

  1. Can Sri Lankans apply for a loan in foreign currency?

Yes. Sri Lankans working abroad can apply for a housing loan in a foreign currency and repay in the same currency. But the policies applicable to this loan may vary depending on the bank. Some require you to be employed abroad for over 2 years, while others want you to show proof for a future contract of 1 year or have an income individually or jointly with your spouse.

Because of this when you are selecting a bank to apply for this loan, make sure you read through the conditions carefully. According to the exchange control act, the loans should be repaid in foreign currency and in the event of the loan being in arrears for over 3 instalments, the bank should recover the loan from the balance in the borrower’s foreign currency account. Further, under no circumstances, should the borrower be permitted to settle any outstanding balance of the loan in rupees.

  1. How do I get a loan through the EPF Guarantee scheme?

You can get a housing loan guarantee from the EPF to apply for housing loans in Bank of Ceylon, Peoples’ Bank, SMIB, HDFC and any branch of a rural cooperative bank. However, the eligibility for the scheme may vary based on the person and his or her contribution to the account.

Active members are eligible for 75% of their balance in one or more of their EPF accounts, inactive members who have not contributed throughout the preceding year are eligible for 50% of their balance and those who are married or having children who are contributing to the account can get a combination of funds in both accounts. But here the amount depends on the person’s credit score.

To apply:

  • A member should obtain 2 housing loan application forms from the nearest Labour Office or download from the website and send them back, duly filled, to the same Office.
  • The Labour Department will check the forms and forward them, based on the information provided in the application, to the EPF Department.
  • If the application is accepted, a certificate will be issued indicating the amount approved. This will be sent back to the relevant labour office.
  • The loan can be obtained by producing the certificate to the preferred lending institute.
  • For more visit http://www.epf.lk/housingloanguarantee.php
  1. How do you reduce your monthly payments after a rate revision by the banks?

If the current market rates are significantly below the contract interest rate, you may request for a rate revision even if your loan interest is on a fixed rate. But this is under the sole discretion of the bank.

  1. What happens if you sell your property before the completion of repayment?

If the property has been taken as a loan collateral by the bank, the borrower cannot sell the property without informing the bank. If you want to sell a property which is a collateral, first you should inform the bank branch where you obtained the loan, about your intention. You can either settle the loan by yourself or you can ask the buyer to pay you through the bank where the bank will recover the dues along with early settlement fee and any other bank charges. The bank will then remit any balances to you. 

  1. Who is eligible to apply for a loan under the professional category?
  2. Medical Officers registered with Sri Lanka Medical Council
  3. Chartered Engineers, Chartered Architects
  4. Chartered Accountants (Members of CA Sri Lanka/ ACCA / CIMA-UK)
  5. Attorneys at Law, Software Engineers
  6. Pilots licensed under Air Navigation Act
  7. Navigation Officers (Marine Officer/ Deck Officer)
  8. Researcher or Senior Academic (recognized as an accredited professional) are eligible for a reduction of 0.5% from the published Floating & Fixed interest rates
  1. Things to check in a housing loan agreement before you sign it
  2. Repayment term

The ‘repayment term’ is the period from the starting point of the loan to the final due date of the loan transaction.