Most of you would be aware by now that the Government and Bank South Pacific (BSP) have entered into an agreement whereby BSP offers an attractive loan product under an agreed Home Ownership Scheme. We say attractive because the terms of this loan are favourable to the customer when considering it with other loan products. You can access the relevant article here.
What we wanted to talk about here is how you as an individual should approach this offer to determine whether this is something you should proceed with and apply.
- Ask yourself about your own financial positionBefore considering the terms of this loan and generally the Scheme, the first thing you need to do is consider your current financial position. How much do you earn, how much are your weekly, fortnightly or monthly expenses, what is the value of your assets and your liabilities. These questions are simple but when you sit down and list them, it can become quite a difficult task. It’s difficult because we’re so emotionally excited about the possibility of owning a home, we tend to push our income higher and understate our expenses. Not being honest, can lead to disaster.Knowing your financial position is important because the bank will consider how much you can borrow and whether you can service the loan (i.e. meet the fortnightly or monthly loan repayments).
- What are the loan features under scheme?Once you assessed yourself, the second thing to do is look at the features of the loan product. Compared to other home loan products, this BSP/Government initiative is the cheapest and most attractive loan. That’s not to say anyone can get their loan approved but the term and interest rate are more favourable to the customer.It must be made clear that we have not sighted the full loan terms and conditions. The basic information has been obtained from the BSP media release. As per the release, the maximum amount to borrow is K400,000, the maximum term is 40 years and the interest rate is 4%.To know the exact terms and conditions it is highly recommended that you contact BSP and get the details.
- Equity contributionIn most home loan products, the bank requests the customer to contribute to the purchase of the home. Normally, contribution is by way of cash. Historically, this contribution has varied from bank to bank and product to product but normally the rate is between 20% to 30% of the purchase price. So, if you’re buying a house that has a price of K300,000 and the equity contribution is 20%, then you will be required to pay K60,000. You can pay more if you have the money and it’s recommended that you pay as much as you can because the more you pay upfront the lower your loan repayment will be.In some situations, banks have accepted contributions from superannuation funds held in Nasfund or Namabawan Super as deposits.In short, you need to ask the bank what the equity contribution is and generally how that contribution is to be paid. More specifically, you can ask whether superannuation savings can be used as the deposit contribution.
- Is there any security to be provided?For a purchase of this magnitude, banks will require security. Security is normally an asset in which the lender holds as security until the borrow, you, pay off all outstanding funds to the lender. The standard security used is the title to the property and the lender will hold the title to the property on purchase until you the borrower have satisfied your loan obligations with the lender. So if the term of the loan is 40 years, the bank may hold the title for that period or shorter if the loan is repaid earlier.
- What are the associated costs of the purchase?The purchase price is only one part on which the loan funds will be directed to. There will be other costs you will need to meet and may form part of the loan. Associated costs of the purchase include stamp duty, valuation, bank fees, insurance and legal fees. There may be other fees as well but confirm with the bank other associated fees and their respective amounts. If you engage a solicitor or other property professional, they will be able to advise you on the likely fees.
- Can I meet the repayment amount?If you are fortunate to get a letter of offer of a loan it is important you read it carefully. The repayment is one part of the whole offer but this is critically important. Take a look at the repayment amount and honestly ask yourself whether you will be comfortable repaying the loan at that amount. It can be a very nervous issue to consider but the fact of the matter is, if you don’t think you will meet the repayment amount you either not sign the offer or at the very least let the bank know what you think. After all, you don’t have to accept what they offer.A good way to check what your repayments might be is to use the BSP Home Loan calculator. The results may not be correct but it’s close enough to give you an idea.
- Interest rate – will it be fixed or variable?The interest rate offered in this scheme is 4%. As mentioned earlier, this is the lowest rate for a home loan product in Papua New Guinea. What you need to ask about this rate is whether it is fixed or variable. If it is fixed, for how long? If it is variable, what will affect its change? The interest is pretty much the determinant factor on whether a loan is cheap or not but it’s important that you ask about the conditions of these rates because some home loans offer a fixed rate only for certain period and for the remainder of the term, it could go up (or down).
- Term of the loanThe term of a loan can make a difference in the amount you repay. The longer the term, the lower the monthly repayment amount will be. But a longer term, could also mean more interest payments which means the loan could become an expensive one. BSP are offering a maximum term of 40 years which under current market conditions is quite long. One factor you need to take account of when considering applying for a loan is whether you can repay for that length of time. If you’re about to retire from work, the chances of getting a 40 year loan will be slim. You may opt for a shorter period but then again the bottom line will be whether you can service that loan during that shorter period.The scheme may be suitable for the young or middle aged worker to get in early on the scheme and repay before retirement.
As you can see above, we’ve touched on a number of areas in which you need to raise questions. While there is a lot of emotion in owning your own home, being honest and asking the right questions is important. This is because buying a home is probably the biggest purchase one makes in a life time and doing it properly and seeking professional advice will make your investment a worthwhile one. There is a lot of risk involved and the bank manages its risk in the terms and conditions it offers to customers like you. You need to consider those terms and conditions carefully and determine whether you have the capacity to meet those terms and conditions offered.
Seek professional help. This is only a guide and we do not expect you to rely on this when applying for a loan but hopefully you will find it handy.
Best of luck…