A common professional advice is to never ever sign a housing loan contract you don’t understand, as the consequences can be severe. To shed light on such agreements, we listed the definition of 20 jargons and terms property buyers typically encountered when obtaining a mortgage.
1. CAVEAT
A formal notice in a deed or title that another party has a right to the property. It is common industry practice for banks to place liens or caveats on a property title when someone borrows a housing loan. The caveat is removed if the mortgage is fully paid, and the borrower cannot transfer ownership as long as the caveat exists.
2. DEED
A legal instrument that transfers ownership of a property. “Deed” and “title” can be used interchangeably. Both signify that you own a property.
3. DISBURSEMENT FEES
These are a group of fees charged by banks and lawyers when someone applies for a mortgage or housing loan. These fees, which are paid by the borrower, include bankruptcy search fees, title search fees, and registration of charge fee.
4. DISPOSABLE INCOME
This is the amount left from your salary after tax deductions and mandatory contributions such as those for the Employees Provident Fund (EPF).
5. EFFECTIVE LENDING RATES (ELR)
Effective lending rates refer to the loan’s actual interest rate after taking into account a lender’s operational costs, compounded interest and borrowers’ average risk margin. Each bank has a different ELR as it factors the lender’s own administrative costs and funding expenses.
Another related term is the Base Rate, which replaced the Base Lending Rate, as the main reference rate for adjustable-rate mortgages. Essentially, housing loans in Malaysia cannot have an interest rate lower than the Base Rate.
The latest Base Rates and ELRs of different local banks since June 2019 are listed in this document issued by Bank Negara Malaysia.
7. GROSS INCOME
For employees, this is the salary paid by their employers before any deductions.
For self-employed or business owners, this is their gross revenue before taxes and expenses are subtracted.
8. LETTER OF OFFER (LO)
This is the document that states the loan terms offered by a particular bank. This typically includes the loan amount, loan purpose, repayment terms, loan tenure, interest rate, collateral, and lock-in period among others.
9. LOAN TENURE
This is the agreed time frame during which the housing loan must be repaid. A common tenure in Malaysia is 35 years, during which the borrower needs to pay the monthly instalments on time.
10. LOCK-IN PERIOD
This is the time frame during which you’re not permitted to fully pay the housing loan through any means like refinancing or cash payment. This usually ranges from 3 years to 5 years or more. If you breach this, you will need to pay an Exit Fee, which is around 2 percent of the loan’s original principal amount.
11. MARGIN OF FINANCING (MOF)
Also called Loan-To-Value (LTV) ratio, this is the percentage banks will lend you based on the property’s price or valuation. Lenders typically offer an LTV of 90 percent. This means if the property costs RM500,000, the bank will only let you borrow RM450,00, and you need to pay the remaining 10 percent (RM50,000) out of your own pocket.
12. MORTGAGE REDUCING TERM ASSURANCE (MRTA)
This is an insurance policy that will fully pay the remaining housing loan instalments in case the borrower dies or suffers from total permanent disability due to illness, accidents or natural causes. Although it is optional, borrowers are advised to take advantage of this as it provides financial protection.
13. OVERDRAFT FACILITY
A lending agreement whereby a bank allows a depositor to withdraw more money than they have in their account up to a certain credit limit. The overall overdraft amount is typically based on 50 percent of the value of the collateral promised by a borrower.
Please note that the computation of the overdraft cap is based on the discretion of the financial institution. The disadvantage of this loan is that it usually has a higher interest rate than a term loan and the bank may demand payment of the overdraft at any time.
14. REFINANCE
This is the act of obtaining a new housing loan to repay the original mortgage. This is typically done when the borrower seeks to secure a lower interest rate and more favourable loan terms.
15. STAMP DUTY
This is a tax imposed on different kinds of legal, commercial and financial documents. Apart from the stamp duty for the transfer of ownership title, property buyers also need to pay another stamp duty for housing loan agreements, which is around 0.5 percent of the loan amount.
16. SUB-SALE
Also called resale, this is the sale of a completed or existing property. As opposed to the sale in the primary market or an off-plan property, this is a sale in the secondary market or the sale of second-hand property.
17. TERM LOAN
Also known as a fixed-rate loan, the interest rate of this loan don’t rise or fall. This means monthly loan instalments don’t change throughout the loan tenure. However, borrowers of term loans can’t benefit from any drop in a bank’s Base Rate, unlike those who took out a floating-rate loan.
18. TITLE SEARCH
This is an investigation or due diligence done to check if the vendor is the legitimate owner of a property. This also checks if the property is unencumbered, meaning there are no existing liens or caveats.
19. VALUATION
This is a professional appraisal of a property’s value done by a bank's in-house valuers or through a firm registered with BOVAEA. Lenders carry this out to determine the LTV or how much they can lend to you.
20. ZERO ENTRY COST (ZEC) LOANS
This is a loan offered by banks, wherein the lender shoulders the “entry costs” like stamp duties, legal fees and disbursement charges. Although attractive, the loan carries a higher interest rate.
For more informative guides like this, visit the PropSocial discussion board.
(Written by G. Zizan, 7th November 2019)
