Home Loans

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Whether you’re new to borrowing or struggling to find an appropriate loan package, we can help you understand what options are available to make an informed decision. Bear in mind you will have to pay interest on what you borrow, which means that the longer the term of the loan the more you will pay in interest. You are also likely to pay fees and charges in connection with your loan.

If you’re planning to buy your first house, moving home or staying put and refinancing, you might want to make an in-depth assessment of your financial situation before choosing a specific home loan package. There are many ways to borrow money to help you buy your house and here we explain how home loans work, how they differ and how to borrow sensibly.

The classic home loan entails you borrowing a sum of money and repaying it back with interest over a period of time. But it’s important to be aware that a home loan is secured against your home. So if for any reason you can’t repay it, the lender can sell your home to recover its money.

Most banks offer two types of home loans – variable-rate and fixed-rate loans. The variable-rate home loan is the typical loan taken by the majority of home buyers. Normally the rate to be paid is calculated as a fixed margin over the bank’s base rate. Consequently, payments made by the borrower on the outstanding balance of the loan may change over time when the bank revises its base rate.

A fixed-rate home loan on the other hand is taken out for a set period with a set interest rate. At the end of the fixed-rate period your loan will be converted to a variable interest rate, unless you decide to opt for a new fixed-rate contract, if available. A fixed-rate home loan can be good if you want to carefully budget your repayment - knowing exactly how much you need to repay means you can plan accordingly and gives you a degree of certainty and security. Fixed loans are a better option if there is an expectation of an escalation in interest rates over the medium to long term. However, if the opposite happens and interest rates fall drastically, you will be stuck with a higher interest on your loan.

If you’re looking for a new home but haven’t sold your present house, you may be able to take out a bridge loan. Bridging loans serve to finance the purchase of your new property, pending the sale of your existing property. The bridging loan will then be repaid from the proceeds of sale of your existing property.

This type of home loan gives you the opportunity to repay the interest only, with the capital to be repaid in one lump sum at the end of the term (which normally varies from a maximum of five to six years). An interest only home loan may be used to end-finance the purchase and/or completion of property for use as a main or second residence. When applying for an interest only home loan, you will have to indicate to the bank the intended source of repayment, for example, the sale proceeds from a property or the maturity of an investment.

There are banks which offer the facility to pay the interest only during the first few years of the loan. The loan is then converted to a capital repayment method for the remaining term and you will then have to repay capital and interest. This type of home loan alleviates the burden in the first few years after buying a house but one has to keep in mind that by not repaying any of the capital during these first years, it will take longer to settle the full amount of the loan and hence pay more interest overall.

In terms of the Consumer Credit Regulations, banks are obliged to provide the consumer with general pre-contractual information prior to the conclusion of a home loan agreement.

In fact, we urge you to check the following list of charges that you might have to pay:

  • before the contract (e.g. processing fees);
  • during the contract (e.g. notary, architect, and registration fees);
  • after the contract (e.g. commitment fees and periodic updates of land registry searches);
  • early repayment fee if you settle the loan amount during the first three to five years (some banks allow overpayments without a charge as long as the additional payment does not exceed a certain percentage of the regular monthly repayment);
  • when settling the outstanding balance of the loan thereafter (e.g. fees to cancel hypothecs); and
  • if you terminate your loan by refinancing it by another bank loan.

Most importantly, in the pre-contractual information given to you, the bank should also quote the Annual Percentage Rate of Charge (APR) on your loan. The APR is calculated on the basis prescribed by law and it represents the actual cost of the loan, as in addition to the rate of interest it includes any charges payable to the bank in relation to the borrowing facility (click here for more information about the APR).

Before deciding to purchase a property, it would be wise to shop around to get an idea of how much you can borrow. Banks will normally take your gross annual income as a base to determine the amount that you can borrow. As a maximum, the repayment on your home loan should not normally exceed 25% to 30% of your gross monthly income. The lender will typically ask you to pay an agreed percentage of the purchase price which will usually be up to 10% (the bank will lend you the difference).

When you eventually find your ideal property and the best deal on your loan, you will have to fill in a loan application form. At this stage, the bank will ask you for various documentation, such as the following:

  • Your I.D. Card/s or passport/s;
  • Evidence of income, FS3 forms (overtime and part-time work may not be taken into consideration) and/or tax returns (as the case may be). The bank will not normally rely on non-official documents which may attest income you may be earning;
  • Statements of your bank account, if you bank with other institutions other than the lending bank;
  • Records of any financial commitments (existing loans or credit advances);
  • In case of non-residents, copies of evidence of income, settled utility bills, Bankers reference, bank statements are required;
  • Architect’s property report and valuation;
  • Architect’s estimate of costs (where applicable);
  • Building permits, layout plans and site plans (where applicable);
  • Preliminary agreement/deed of acquisition;
  • Ground rent receipts (if applicable);
  • In case of request for a re-finance, copy of sanction letter and loan statements;
  • Other documentation as required by the bank.

If your home loan is approved, the bank will issue a sanction letter with the terms and conditions governing your loan. The sanction letter will outline the amount and purpose of the loan, the rate of interest being charged, the monthly repayments, the duration of the loan (which tends to range between 35 to 40 years) and the Annual Percentage Rate of Charge. The sanction letter will also define the legal and processing fees that will have to be paid (if any), early and/or late repayment fees and any commitment fees (if applicable). The type of security required (such as life and home insurance and hypothecs on the property being purchased) will also be clearly explained. Finally, the sanction letter will also include an explanation of the ‘events of default’ and the course of action that will be taken by the bank in such instances.

If you decide not to take a loan with a bank after a draft sanction letter has been issued, your bank may decide to apply a fee for the administrative work it incurred for processing your loan application. Double check with the bank about this charge to avoid surprises.

The MCCAA has publishes a set of guidelines for the Home Loan (Amendment) regulations (Legal Notice 259 of 2016). To read more click here



Last updated: Sep 07, 2016

Home Loans

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