Buying a property is a very important aspect in adult life - and not a small decision to make either.
After going through the hassle of finding a desirable property within an affordable range, there are all the documents that need to be prepared and signed.
Another issue that a new homebuyer will face are the various terms that they will encounter. So here is a list of what all the various terms mean when it comes to the property buying process.
The borrower is granted a legal authorisation or permission to temporary suspend or
postpone their loan repayment for a given time.
2) Loan Deferment
This is when borrowers are not required to make any repayments, and no late payment charges or penalties will be imposed. This comes after a temporary suspension on loan repayment (principal and interest) is made.
Arrears refers to either payments that are overdue, or payments to be made during a given time.
4) Interest Rates
Interest rates are the banks’ way of earning money. It is the amount of money that is paid on top of the principal amount to the bank. It is the percentage of the loan outstanding.
5) Compounding Interest / Compound Interest
This can be thought of as ‘interest on interest’. It is the addition of interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It is also applied to both loans and savings accounts.
6) Accumulative Interest / Cumulative Interest
This is the total sum of all interest payments made on a loan over a certain period of time.
A valuation is compulsory for purchasing a property. It is an estimation of the property’s worth, which the Stamp Duty of the property is based on the value of the property.
There are two types of valuation - one is based on the transactional value of the houses within the same area which may not be representative of the real value of the property, and the second is a valuation by a licensed valuer.
The banks will usually rely on the figures provided by the professional valuers.
8) Monthly Instalments
Monthly instalments are the amount that you will be required to make upon procuring your loan.
The amount that needs to be paid monthly is dependent on the Loan Agreement you sign between the bank.
9) Early Settlement
This is when a borrower finishes the full loan payment before the agreed date. For example, a borrower who pays off their 30-year home loan within 20 years.
While this is good for the borrower, the banks do not like early settlements as their profit from the interest charged are lowered.
Therefore, depending on the Loan Agreement signed, the borrower will either enjoy a rebate; or suffer a penalty.
If the borrower chooses to settle the loan early, they will have to bear the cost of discharging the property from the bank.
This will require them to get the Discharge of Charge form from the land office, also known as Form 16N from the National Land Code 1965.
Aside from settling the loan early, refinancing is also considered early settlement and will be treated as such.
10) Lock-In Period
This is the time frame when you are not allowed to make an early or full settlement of your loan. It is usually within the first year or so, during which a penalty of between 2% and 5% of the outstanding loan amount will be charged by the bank.
Not only is the property market competitive, the financial institutions also have their own price wars.
Some banks offer lower interest rates, some come up with special promotions and some have special refinancing packages.
These packages usually require more time for the bank to earn their money back, hence they have lock in periods to prevent the borrower from leaving.
This means that within the stipulated amount of time, the customer cannot settle the loan early in any way - otherwise they will need to pay a penalty.
The lock-in period is stated on the Loan Agreement, and is usually fixed at between 5 to 7 years at a rate of 3.5%.
The Base Lending Rate (BLR) is based on Bank Negara Malaysia (BNM), and then adjusted by the banks. For example, BNM may set the BLR to 6.6%, but the banks may offer them at 5.7%.
Different banks have different BLRs, based on the bank’s calculation of their administrative costs and the fund structure. An increment or decrease in the BLR will affect the borrower’s interest rates directly.
The highest BLR in Malaysian history so far is 12.27% in 1998, while the lowest was 5.35% in 2020.
12) Base Rate
Base rate is the interest rate that Bank Negara Malaysia will charge commercial banks for loans. It is then used as a reference rate where commercial banks can determine the effective lending rates to their customers. These rates vary from bank to bank, based on their efficiencies of lending.
Previously in 2015, banks referred to the Base Lending Rate (BLR) structure, which was subsequently replaced by the new Base Rate (BR) system.
13) Balance Purchase Price
The term Balance Purchase Price is exactly that - the balance of your purchase price. When you decide to purchase a property, you will have to pay a down payment to an escrow - otherwise known as “in trust of”.
This is usually the agent who is handling the transaction. So for example, if your property costs RM100,000 and you put a down payment of RM10,000, the balance purchase price is RM90,000.
The full amount of the money is only released to the seller after the transaction is fully concluded. In the event that the sale fails to go through, the down payment will have to be returned to the buyer.
14) Progress Payment
Otherwise known as “progress billing”, this term is used when the borrower starts paying only partially and gradually as new phases of a new project are completed. This is to avoid having to make a full lumpsum payment at the end of construction, which can be burdensome for some.
In other words, the amount that needs to be paid by the borrower progressively increases as the building is further developed.
For example, the borrower will not need to make any payment as long as the foundation of the building is not completed yet.
However once the development reached 10% completion, the borrower will need to start making a minimal amount of payment.
The amount will be stipulated in the Sale and Purchase (SPA) agreement which can be found under Schedule 3 of the SPA, or Schedule G/Schedule H under the Housing Development (Control and Licensing) Regulations 1989.
In the secondary market, if the buyer is able to make full payment on the property, then there will be no need for progress payment as the buyer will be able to make the payment in full.
15) Free Moving Cost
When refinancing your loan from one bank to another, the free moving cost will be applied. This is where the new bank will take responsibility of all legal fees, penalties and charges.
This includes the charges for disbursements, legal fees, Mortgage Reducing Term Assurance or Mortgage Reducing Term Takaful - depending on the package and agreement.
The costs that are borne by the bank are usually inadvertently repaid by the borrower through various means such as higher interest rates, longer lock-in periods and such.
16) Meaning Of Margin In Housing Loan
The term Margin means the difference between the amount loaned by the bank and the price of the property. If the property is priced at RM300,000 and the bank loans you only RM250,000. The margin is the difference of RM50,000.
It is rare for the bank to ever provide a full loan of 100% - the usual is 90%, and even the approval rate for a 90% loan is harder to get compared to the previous years.
17) What Is A Charge?
There are 2 categories of loans provided by the banks - a secured loan and an unsecured loan.
A mortgage loan is considered to be a secured loan, as the bank will take the property as collateral in case the borrower is unable to make good on their payment.
The property will then only truly belong to the borrower once he completes his payment.
In the meantime, as the bank is not the real owner of the property, the property will be “charged” to the bank whereby the bank is known as the “chargee" and the owner of the property the “chargor”.
The charge is filed under Form 16A at the Land Office, and is governed under the provision of Section 242, National Land Code 1965.
This is a legal document to show that the ownership of a property has been transferred from one party to another.
A Deed of Assignment is everything that the Form 16A is, except for a property without title.
Until the property acquires an Individual Title, a Deed of Assignment is the only proof of transaction that the borrower has with the bank.
The bank will keep the original copy, and a duplicate will be provided to the borrower. Once the property acquires its Individual Title, only then will it be able to get a Form 16A.
If the borrower finishes their payment before the property acquires its Individual Title.
Then the borrower will get a document called the Deed of Receipt and Reassignment when the bank discharges the property to the borrower.
19) Consent To Charge
If you wish to charge the title of the property, which is restricted only for the sale or transfer of ownership, a consent to charge is obtained at the consent of the land office.
The rules and requirements will differ from state to state, within Malaysia, hence the forms and requirements will also differ from state to state.
But the compulsory set of documents that need to be present when making the application are:
Identity cards of both the buyer and the seller
If the property is still under a bank loan, a letter from the bank allowing the sale is also needed
The state government will also need a certified true copy of consent to transfer from the seller of the property.
20) Adjudication In Property Transaction
The definition of adjudication is a formal judgement on a disputed matter.
In property terms, this is applicable to the construction industry where the parties involved dispute about payments - and is also applicable on disputes of the Stamp Duty.
So when we talk about adjudication on property transaction, we actually mean an adjudication on Stamp Duty.
Although disagreements rarely happen, there are times when the purchase price of the property stated in the Sale and Purchase Agreement is lower than the stamp duty office’s estimation.
The issue is usually raised up during payment of the Stamp Duty.
The process usually begins with the lawyer filing Form 14A from the National Land Code 1965 - the document required for the transfer from one party to another.
The various Borang Penaksiran Duti Setem (PDS) forms will also be submitted.
In lieu of the parent to child transfer, under the Stamp Act 1949, a 50% discount is given when a parent transfers the property to their child.
The required supporting documents in this case are the Birth Certificate and occasionally also the Marriage Certificate together with the adjudication documents.
21) MRTA / Takaful
When the bank agrees to provide a mortgage loan, they will also naturally require the borrower to cover any possible risks to the bank.
This comes in the form of the Mortgage Reducing Term Assurance (MRTA) or Takaful - property insurance that ensures that the mortgage loan will still be paid for even if the borrower experiences total permanent disablement or passes away.
Both the MRTA and Takaful insurance operates the same way - they will cover the loan of the property even as it reduces.
This means that the initial amount will cover the mortgage loan in full, and as the borrower continues to make payment which in turn reduces their loan, their insured amount also lowers accordingly.
Both insurances will have the same tenure as the loan taken. This means that if the borrower obtains a 35-year loan, the MRTA or Takaful insurance will also have a tenure of 35 years.
In the event that the borrower never made a claim upon full repayment of his loan, a small amount of the money paid will be returned back to the borrower.
In the event that there is a co-borrower and one of them passes away, the insurance will also cover that party’s part of the loan.
The only difference between the MRTA and Takaful loan is that the Takaful loan follows the Islamic finance guidelines issued by Bank Negara Malaysia (BNM).
22) Co-Borrower, Guarantor And Third Party Loans In Housing Loan
In these times where it is difficult to procure mortgage loans due to the tight restrictions, there are those who find various methods to obtain a one.
One of the methods is to look for a co-borrower, and another method is to look for a guarantor. While similar in the sense that both enable a principal borrower to obtain a loan, they are distinctly different.
A co-borrower is when a person who has insufficient income resulting in a less than decent Loan-To-Value (LTV) or has a bad CCRIS looks for somebody who has good LTV or CCRIS results to use the person’s name to get the loan.
in simpler terms, if you agree to purchase a property with another person, then it will be termed as co-borrower. The co-borrower will share the liabilities with the principal borrower - you!
This includes the property appearing in the co-borrower’s CCRIS report as well, and in case the principal borrower passes away, the co-borrower will also be responsible for the loan.
The Sale and Purchase (SPA) agreement will have both party’s names in the document.
Occasionally there will be a loan where the property is purchased under more than one name, but there will be only one name in the loan, or vice versa.
The name on the loan and SPA document can also be entirely different. This is known as a third party loan. These cases are unique, and is usually only allowed between family members and spouses.
A guarantor is a person who backs-up and confirms the borrower’s capability to make payments on their loan. Usually, a guarantor is liable only if the borrower defaults on their payments.
In this case, the bank may choose to go after the guarantor. A guarantor can opt out of being a guarantor at any time during the tenure of the housing loan.
Also unlike a co-borrower, a guarantor is not required to sign any housing loan agreement, consent to charge application, statutory declaration or any other document securing the property in the bank’s name. A guarantor will only sign a guarantee letter.
23) Memorandum Of Deposit
This is an agreement with the bank to deposit a sum of money as security for a housing loan. If the borrower fails to make timely payment, the bank can then be allowed to deduct the instalment from that deposit.
24) Disbursement Of Housing Loan
This means that once the loan is approved, banks will start paying out the money for the housing loan, to either the borrower or property developer.
The “activation” of the loan begins the moment the first disbursement goes out. If the property is already completed, the full amount will then be handed to the seller in a lump sum.
Otherwise if the property is still under construction, the disbursement will be given out in pre-agreed stages which the percentile are stated in Schedule G for properties with individual title and Schedule H for properties without individual titles.