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The Baiting Game
01/03/2005  Published in Malaysian Business - Housing & Property By National House Buyers Association of Malaysia.

Look beyond short-term gains in choosing a housing loan.

The banking system is flushed with RM140 billion liquidity. This explains the increasingly aggressive sales promotions undertaken by financial institutions for the housing industry. Even credit card recruitment has taken to the shopping malls, hypermarket concourses and popular food stalls. Whilst we will leave it to our economic gurus to analyse whether these are good indicators or not, one thing is for sure: securing a housing loan is now a less intimidating effort.

For many of us, the purchase of our house or investment property is the largest financial commitment we will ever make. This makes arranging the most suitable housing loan just as important. Make sure you know all the costs of entering into the loan and purchasing the property. These include 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 squeeze you into, but rarely will they tell you the disadvantages.

Always look at the total deal, not just at the carrots dangling in front of your face. Compare the entire housing loan cost of several different lenders to determine which type of is best for you. We would like to discuss some of the lenders' offers that may not be as attractive as they appear.

'Honeymoon' Start

Let's begin with the special low interest offered for the first year. 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 commenced 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. If he were to start the application process a few months after the start of the campaign, it is likely that he will enjoy the special low rate for a very short period.

Also, due to our unique system of progressive payments to developers, the mean average of the amount disbursed by banks during the first year is minimal. Thus any savings on interests is much less than it seems. These have all been figured out already by the bank's marketing experts. 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. We believe that anything short of that makes the offer a sales gimmick.

It's up to us

There are other clauses that put house buyers in disadvantaged situations. Some lenders include clauses in the loan agreements that give them the absolute rights to alter the margin of interest. Doesn't his in effect nullify the typical attractive sales brochure offers of 'BLR plus X% for following years'? One cannot make a special low interest offer in the sales campaign and then contractually (through the loan agreement) create a clause to allow the offered interest rate to be invalidated. That would make the special offer a sales gimmick.

Pay to leave

One other clause to look out for is the exit penalty upon redemption of the loan. A house buyer may wish to sell the house or fully settle the loan for whatever reasons. This is where the conditions for full settlement differ from one institution to another. Think long term. Do not be in a disadvantaged position 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 year or even the second and the third year. So do not be taken in by the very attractive offers during the honeymoon year/s of the loan tenure. Remember, the remaining 25 years is more important. Do not go for short-term gains only to lose out heavily in the long run.

Do your homework

We would advise house buyers to look beyond the first year of so-called low interest when shopping for housing loans. With the stiff competition going on among the various lenders today, one should seriously take some trouble shop around and study each offer and its fine print before making a decision. There are subtle but material difference between the various schemes and offers among the lenders. Seek the opinions of your banker, accountant, financial planners and lawyer friends.

We wish to stress that once the application process starts, it is unlikely you will have time for any change of mind. By the time the formal letter of offer is received, if one does not agree with any of the conditions within,  there is usually no more time to reapply to another financier without incurring late payment penalties or interest payments.

Most of the complaints we have received on housing loans are on late payment interest due to banks that are slow in approving or disbursing loans and with communication problems. Buyers rate banks that are responsive high on their list.

Buying a home is a very serious investment that should work right on the first try. Do no be impulsive. Patience and planning are the key words.


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