Hidden Clauses / Terms in your Letter of Offer…

There are great home financing packages out there, and some seem too good to be true. Every other month, banks and financial institutions offer products with attractive feature to make sure you select them.

However, as a prudent purchaser, you must also be aware of the trapdoors of financing packages as banks will always provide various clauses in their documents to protect its interests. Be careful of the hidden clauses in your letter of offer, and understand the impact of such clauses.

Many consumers take the letter of offer (and the attached terms and conditions) for granted. Only after something goes wrong would the clauses be highlighted to you by the bank’s officer. And the clauses were never mentioned to you during the marketing phase of the loan by the bank’s officer.

Just like the bank officer’s job to sell you the latest home financing products, it is also your job to check for hidden clauses which might be unfair to you.

As the home financing is a long term commitment for many people, you DO NOT want to be stuck in a home financing package which is a disadvantage to you.

Two rules to overcome this :

  1. Read the Letter of Offer, including the terms and conditions and appendix. DO NOT BE LAZY, so make sure you read all clauses. If necessary, take the letter home and better still, go through the letter with your lawyer. It is your responsibility!
  2. Clarify all vague clauses. If there is any doubt for any of the clauses, DO NOT be afraid to ASK the bank officer in charge. It is their job to SATISFACTORILY explain the clauses in the Letter of Offer. Don’t be shy to ask, it is your right to ask!

But what should you check for? Of course, it is unreasonable to discuss each and every terms and conditions, as they are usually standard documents. However, do look out for various clauses which may not be favourable to you. Among the areas you should look out for are:

  • Free-moving costs / zero-entry costs.

The main confusion on these terms are what items are covered under the free-moving costs / zero-entry cost. Ask the banker CLEARLY what is covered under the package as it varies from bank to bank.

  • Default penalties.

Some banks include a clause where if you failed to make a number of on-time payments for your instalments, the bank will AUTOMATICALLY revise the financing package into the highest financing rate in the package. Considering that you may have instances where a payment is missed (such as during overseas travel / vacation), this is a serious consideration, especially when you are locked in for 5 years. Ask the banker as to “what is considered as a late payment”, so that there is no confusion. Also, check on the imposed penalty charges as some banks charged a fixed sum while other charge a certain percentage. You should also compare this with other banks to see if the charges are competitive.

  • Early settlement penalties.

Most banks impose an early settlement penalty for exiting the loan from the bank during the early part of the financing. Check to see if the bank charges such penalties for early settlement by paying via your own funds, refinancing to another bank, or disposing (selling) your property. Also, check if the penalty is based on balance outstanding or original financing amount, and what is the amount of penalty.

  • Prepayment clauses.

When you make excess payment on-top of your regular instalment amount, they become prepayments. Some banks consider these excess as capital repayment (which contribute to reducing your following month’s interest), or only consider them if made in multiples of RM1,000. Some banks require advance notice while others do not. Check which one is yours.

  • Compulsory MRTA.

Some housing packages impose the conditio n that MRTA is “highly encouraged” (as Bank Negara generally do not allow banks to make MRTA compulsory). Personally, MRTA is a wise investment for you, but do check around for the prices offered by other operators to ensure the MRTA offered is competitive.

  • Special FIRST YEAR rates.

When the product is marketed to you, banks may offer SPECIAL first year rates to attract your interest. For example, 0.00% p.a. for the first year or until 30 September 20xx whichever is earlier. Bear in mind although this is attractive, if the package has been offered for some months and the legal process (until loan disbursement) takes between 3 to 6 months, you may end up enjoying the 0.00% p.a. rate for maybe a few months. Check with your banker on this.

  • EPF withdrawals.

Many people feel that withdrawing your EPF (from Account 2) to deposit into the housing loan account is a good strategy due to the low returns from EPF. I share the same view on this. However, please bear in mind that the EPF amount cannot be re-draw as pre-paid principal, although you have take the product with the principal re-draw features. The letter of offer usually clearly state this clause, so take notice.

  • Valuation Reports.

Usually, valuation report are not a requirement by the bank if the property is BRAND NEW, i.e. purchased direct from developers. As for other types of purchases / financing (e.g. purchase from individuals, auction properties, refinancing from another bank), the bank usually requires you to submit a formal valuation report (usually from the bank’s panel valuers) upon approval / acceptance of your application. If the formal valuation report shows a lower property value than the amount approved by the bank, your loan MAY BE reduced accordingly to meet the formal valuation. Also, check you letter for clauses requiring you to submit a valuation report periodically (every 1 year or every 3 years),which will mean additional costs to you everytime the valuation is done. Usually, such clause will be included if your loan facility is attached to an overdraft facility, where an annual review is conducted by the bank. So, be informed on this.

  • Cross default by other loans.

If you have more than one loan account with a bank, you should also note there is a clause on cross-default. This simply means that if your other loan with the bank becomes delinquent / non-performing, your housing loan may also be classified as non-performing (cross-default). Check with the bank what happens to your housing loan if this happens, especially if your other loan is of lesser value than your housing loan.

The above are some of the basic clauses that you may have to be aware of. There are many other clauses so do not be afraid to sit and go through your letter of offer with the banker. Ask questions, if you have any area of doubt. It may save you money, as well as tension further down the road.

When in doubt, ask QUESTIONS. Remember, it is your responsibility.

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4 Comments (+add yours?)

  1. deli
    Jun 01, 2010 @ 06:24:11

    the prepayment clause, does it means that, the extra payment we make every month from the installment, will only deduct profit/interest only or principal?

    kind of confuse here…please advice.

    Reply

    • Amir
      Jun 01, 2010 @ 21:29:13

      Most banks take any extra payment (above the scheduled monthly instalments) as principal payment. That means that if your monthly instalment is RM1,000 and for the month, you made a payment of RM1,200 the “extra” RM200 is taken as capital repayment and your next month interest is calculated based on the reduced capital i.e. the principal balance outstanding less RM200 x Interest Rate x days in month / 365.

      However, there are also some banks which states that any principal repayment must be in the multiples of RM1,000 (or any other stipulated amount). In such cases, if you paid RM1,200, the “extra” RM200 is taken as “advance instalment” and will not reduce the principal. This means your next month interest is calculated based on principal balance outstanding, but your instalment amount due will be RM1,000 less RM200 = RM800, for you to remain on-time for your payments. They will only take the extra payments as “principal payment” if it is in multiples of RM1,000 i.e. RM1,000 / RM2,000 / RM3,000 etc.

      Check with your bank how they treat prepayments in their systems. Is it “principal payment” or “advance instalment”? Ask them.

      Reply

  2. pG
    Jun 15, 2011 @ 02:25:07

    want to ask you..i take SC housing loan..the term
    for PREPAYMENT

    PREPAYMENT : prepayment/redemption is not allowed prior to full drawdown of the facility. upon full drawdown, prepayment/redemption is allowed in multiples of RM1000 provided that :
    a) For prepayment not amounting to full redemption, prior written notice must be given to us; and
    b) for full redemption, prior one months written notice is give to us or lieu one months interest is paid to us

    is this mean advance installment.. ??? because just currious if we pay more..then let say, we paid2..then reach until we in advance one year from tenure period..eg in agreement 30Yrs..but we completely paid the bank when reached 29Yrs..can cause penalty or they can release the house to us ????

    In my letter of offer didnt mention about penalty for early settlement..

    Reply

    • Me
      Jun 15, 2011 @ 12:46:49

      Yes, the term Prepayment is same as advance instalment, in the context of housing loan. This means whatever you paid extra, it will reduce principal and in effect, reduce the tenure. By this way, there is no penalty interest to be charged, as and when the principal is paid off, the bank will release title to you.

      This is different from early settlement/early redemption, where usually the Bank will require 1 month’s notice, which is effectively 1 month interest penalty for the early settlement / early redemption.

      Reply

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