Things to be aware before signing letter offer

 

Things to be aware before signing letter offer

 

Things to be aware before signing letter offer

 

Most of first time home buyer stumble and ponder with this issues, what’s there to be aware before signing my first Mortgage/Housing loan Letter offer?

What precaution on the clause stated must I beware? This article written isn’t against bank’s issued letter offer being hanky panky (well sometimes it is =P). It’s just a general understanding of the clauses in the letter offer before committing to it.

 

Here, I have breakdown few important points for first time home buyer, understanding the Mortgage loan/ Housing loan letter offer they sign.

  1. Inquire the penalty charges. If any late payment involve in the future, how much will the bank increase the rate and will the rate be reversible if paid prudently after that?
  2. Below shows 2 different letter offer clause of default payment penalty stated. 2 different Mortgage loan/ Housing loan letter offer from 2 banks are shown to show the vast contrast between different bank penalty clauses.

    Based on Illustration example 1

    If you default your loan for 1 month, the effective lending rate will be altered to 3.2% + BR and 1% on top of the prevailing interest rate on outstanding amount whichever is higher.

    Hence, if you took the loan with effective lending rate BR 3.5% + 1% = 4.5% effective lending rate and you default for just 1 month MONTH! Your effective lending rate will altered to 3.2%+BR 3.5% = 6.7%.

    It’s a smacking figure on Mortgage loan / housing loan. Even though you pay on time after the interest rate hike, bank with their authoritative rights might decline reducing the interest rate back to initial offered rate. There’s case whereby client successfully reduce their interest rate back to original, meeting and discussing the issues with the bank over and over till they agree..

    However, if you default with a solid reason, you can request for the rate reduce back to initially offered rate.

    Example illustration 2, shows that this bank would allow only 2 months of consecutive defaulting, before they will alter the bank interest rate.

    So it will be wise to read the letter offer and knowing what’s the default period. Hence you will be aware on the penalty terms.

    Prudent advise, always put at least 2-3 months of installment cash into the advance account, so that if anything might happen (such as travelling and etc), it will deduct from that account.

    Illustration example 1:

    30days defaulted will lead to interest rate hike.

    Example 2:

    60days defaulted will lead to interest rate hike.

  3. Paying extra installment? crediting extra cash into loan account?
  4. If you pay extra monthly on top of your installment, you can reduce your total interest charges on your loan!

    Loan : RM500,000

    You wish to put extra cash into the loan account to reduce the interest.

    Example: If you pay extra on top of the current installment.

    I. When you pay extra on monthly installment, it will reduce your total interest charges on your loan.

    Housing loan

    Rm500,000 /

    4.5% interest rate /

    35 years loan tenure /

    Monthly installment is RM2,366 (Rm1,875 Interest + Rm491.28 Principal = Rm2,366)

    As you can see, your installment payment are actually paying more towards your interest than your principal.

    If you decided to start paying extra RM500 every month. Your Monthly payment will be RM2,866 (RM1,875 Interest +RM991.28 Principal = RM2,866)

    You will be paying more towards your Principal with the extra RM500. Hence, if you continue paying extra RM500/month consistently.

    Your total interest saved would be RM180,759

    Your Loan tenure will be shorten by 136months.

    -This will help reduce your interest charges and reduce the loan tenure.

    II. Credit extra cash into Capital account/advanced account

    This is different form paying extra on top of your monthly installment.

    If you have a sudden influx of cash, lets say inheritance of RM100,000, and you decided to put it into your housing loan capital account / advanced account, because you have max out ASB and other financial options.

    Housing loan Rm500,000 /

    4.5% interest rate /

    35 years loan tenure /

    Monthly installment is RM2,366 (Rm1,875 Interest + Rm491.28 Principal = Rm2,366)

    Total interest charge: RM493,837.28

    – If you credit in Rm100,000 into the housing loan capital / advanced account, housing loan outstanding would be RM400,000 (RM500,000 -RM100,000), and paying the same installment amount, this will reduce your total interest charge to Rm395,072.

    Because the interest you are paying right now is 4.5% on Rm400,000 instead 4.5% on Rm500,000.

    Hence, you save interest and reduce the loan tenure likewise.

    Do note* Your installment will be alter if interest rate increase and bank decided to adjust your monthly installment payment RM2,366 for the rest of the mortgage tenure, bank adjustment of installment is subjective. Else, installment will fixed as initial throughout loan tenure!

    It will state in your letter offer whether by monthly or daily rest. As below picture.

  5. Monthly rest or daily rest interest ?
  6. How does monthly rest or daily rest diff?

    Before that, understand both terms.

    I. Monthly Rest Interest – Interest of loan calculated based on outstanding balance from previous month.

    II. Daily Rest Interest – Interest of loan calculated based on outstanding balance from previous day.

    Example I:

    Interest Calculation

    “Ali has a home loan of RM500,000. The interest rate is set at 5% p.a. with a tenure of 20 years. Based on the amortization formula, Ali’s monthly installment adds up to around RM3,299.78. Ali proceeds to pay his first installment on the 15th of June. ”

    A table calculation breakdown done based on the scenario above to give you a better picture.

    Monthly Rest Interest

    Total Interest Payable in Month 1 = Principal Amount * Interest Rate * 1/12

    = RM500, 000 * 5% * 1/12

    = RM2, 083.33

    Daily Rest Interest

    For the daily rest calculation, we have to first calculate the interest charged from 1st June to 15th June

    Interest Charged from 1st June to 15th June = Principal Amount * Interest Rate * 15/360

    = RM500, 000 * 5% * 15/360

    = RM1, 041.67

    Now let’s calculate how much is paid to principle after paying off the interest from 1st June to 15th June

    Outstanding Loan Amount after 15th June

    = Principal Amount – (Monthly Installment – Interest Charged from 1st June to 15th June)

    = RM500, 000 – (RM3, 299.78 – RM1, 041.67)

    = RM497, 741.89

    Now, let’s calculate the remaining interest for the rest of the month

    Interest Charged from 16th June to 30th June = Outstanding Amount * Interest Rate * 15/360

    = RM497, 741.89 * 5% * 15/360

    = RM1, 036.96

    To calculate the total interest paid for that month

    Total Interest Payable in Month 1 = RM1, 041.67 + RM1, 036.96

    = RM2, 078.63

    Comparison of Monthly Rest Interest vs Daily Rest Interest

    Total Saving of Interest Payable in Month 1 = Monthly Rest Interest – Daily Rest Interest

    = RM2, 083.33 – RM2, 078.63

    = RM4.37

    *Note; Number of days in a year used in daily rest interest calculations will vary from bank to bank. In this illustration, we use a total of 360 days in a year. In reality, banks may use a total of 365 days in a year to crunch daily rest interest calculations.

    From the illustration above, Ali saves a grand total of RM4.37 when he pays his installment on the 15th of the month. From the daily rest interest calculations above, you will see that the earlier payments are made, the more you save.

    The savings of interest payable may not be significant in the short run (just RM4.37 in this illustration). However, the effect is compounded in the long run when you factor in the larger sum of principal reduced down the line.

    Are Daily Rest Interest Rates Really Better?

    It’s important to note that this is not a one size fits all scenario. The daily rest interest mode of calculation could also be a double-edged sword. Take a look at the habits below.

    Clears of monthly installments in advance

    Willing and able to make extra payment towards monthly installments

    If your payment habits matches the above then the daily rest interest mode of calculation is certainly beneficial.

    However, if you don’t repay your installments on time, you can end up paying more due to late payment penalties. Remember, the late payment penalties go up every day based on the daily rest interest albeit at a marginal difference.

    Now different in monthly and daily rest

    For monthly rest, when you credit extra cash into loan account, it will not straight reduce the the interest rate, but will calculate and reduced by end monthly term.

     

    For daily rest, when you credit extra cash into loan account, it will straight away reduce the interest the next day, which is by daily rest calculation. Interest reduction will be calculated starting the next day.

    Conclusion, daily rest is much preferable than monthly rest.

    https://loanstreet.com.my/learning-centre/Monthly-Rest-Interest-Vs-Daily-Rest-Interest

    Any additional fees incurred?

    -Usually if you opt for full flexi, there’s a set up fees RM200++ charged, and such fees aren’t incur in semi flexi. However, some other bank’s practice, semi flexi will also required to pay set up fees.

     

    Rm 10 maintenance fees will be required to pay every month to the bank, for current account provided. If you opt for full flexi

    – Termination fees RM1000-3000 range. After you signed letter offer and banker has submitted it back to the HQ. If you have a second thought and wish to cancel the deal. Bank will charge you for the termination fees. The fees charged are reasonable, as bank paid administration cost etc to facilitate letter offer issuance.

  7. Lock in period (for under construction property)
  8. Lock in period is the penalty charged, if you settle your loan within penalty period that bank set. Usually the lock in period is

    3-5 years.

    Now our question is, when will lock in period be effective from?

    whether charges of penalty effective from 3 years of 1st disbursement or after full disbursement.

    This will only applicable to under-construction property. Usually, subsales property lock in period start from first disbursement.

    *Disbursement is the release of money*

    *1st disbursement for undercon property is the release of money to the developer based on scheduled of payment*

    *1st disbursement for subsales property is the release of money to the previous seller bank*

    *2nd disbursement for undercon property is the release of money to the developer based on scheduled of payment*

    *2nd disbursement for subsales property is the release of money to the seller*

    Example:

    “1st disbursement” happens in 2015 = 2015+3 years

    full disbursement”happens in 2017= 2017+3 years

    see the difference? full disbursement actually takes 3+3 years means 6 years before penalty is voided.

    Make sure the stipulated loan package requested with the banker are listed the same in the letter offer.

    – Your loan amount

    – Loan tenure

    – Package (full or semi flexi)

    – Your name

    – Your mailing address (so that bank would be able to update you via letter regarding your loan)

    – The offered effective lending rate (Interest rate)

    – Security address of your purchased property (your purchasing property correct address)

    It will usually state in the first page of letter offer or the subsequent PDS summary page.

Any inquiries, do drop comment down below. 🙂

Cheers

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