Homeownership boost – start planning

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The recent announcement by the Prime Minister of Papua New Guinea that the Government has entered into an agreement with Bank of South Pacific to provide home ownership opportunities has created excitement as well as anxiety. Is this proposed arrangement a positive one for citizens who continue to dream of owning their own home?

At present, high interest rates and high property prices have prevented many citizens from considering applying for home loans. If the brief details provided under this BSP/Government arrangement is true, than one can expect a sharp rise in housing loan applications.

You can read more about the announcement here http://skerah.com/2014/bsp-and-png-government-collaborate-to-creating-home-ownership-opportunities-for-papua-new-guineans/.

While there are still questions to be asked about this arrangement, let’s comment on information that is already available from media releases so that you can consider this arrangement from different perspectives and based on your own judgement, plan ahead.

The biggest drawcards that can attract potential homebuyers under this arrangement are:

  • 4% fixed interest rate
  • Repayment of up to 40 years available
  • No bank fees
  • No penalty for early repayment

If the interest rate and repayment terms aren’t enticing enough, than we’re not sure what will ever entice a potential homebuyer. Current interest rates on home loans at commercial banks range from 8% to 10% which makes this 4% a real bargain. But that’s only part of the equation.

The repayment term under this proposed arrangement is up to 40 years. Current repayment terms for owner occupied home loans is between 25 to 30 years. With an extended term of 40 years, the monthly repayments are likely to be lower. This leaves more money in the pocket for the homeowner in the short term.

In the long run, this new loan arrangement could be more expensive because the longer the term, the more interest you are likely to pay. This comes to the issue of early repayment.

If you can pay more than the agreed repayment amount on a regular basis, it’s possible to pay off your loan earlier than agreed and save money on interest payments. With no penalty on early repayment, it’s a real benefit to the potential homebuyer.

Obviously, not many people get to pay more than they’re required to under any home loan but for the smart and committed, it’s an opportunity to save.

Current loan products have various bank fees associated with them. Even before you make your purchase, the bank has an initial bank loan fee and various other associated charges throughout the life of the loan. These fees increase the loan and becomes a cost to you. The proposed arrangement however states that no bank fees apply. Obviously, you will have to read all the fine print and if there is in fact no fees, then it’s another tick to the potential home buyer.

Given the above features intended to entice potential homebuyers, one wonders whether there is any catch to this or why BSP is offering such a product that is much cheaper than its competitors. Are there any catches potential homebuyers should be aware of?

Like every financial product, you will have to know the full details of the product before you can make an informed decision. At present, there are still some questions that remain answered.

One of the questions is whether the potential homebuyer is required to put up equity or a deposit and if so how much. Given the Government’s injection of capital, is it possible that that capital could be used as the equity contribution? It’s highly unlikely this could be the case as the Bank will normally ask you to put up the deposit not only to carry some of the risk but also to show that you are committed to the loan and that your deposit shows that you have a history or the ability to save.

BSP is a commercial bank and its processing of loan applications under this arrangement will be purely commercial. The present arrangement appears to be that the Government, as a responsible Government, is being seen to take some responsibility of its peoples housing concerns and by injecting the capital it is taking some of the risk off from the bank. By taking some of the risk, the bank is able to lower its interest rate and “relax” some of its terms to make access to finance for Papua New Guineans more accessible.

Through this arrangement, it appears that the bank is relying on voluminous housing loan applications from eligible Papua New Guineans to provide its return and of course increase its loan portfolio.

The full details of the loan is not yet known to many potential homeowners and homeowners should be on the lookout for the release of this information because the terms are, on the face of it, attractive.

It’s not a free grant or something of that nature. It’s a purely commercial arrangement with more affordable terms compared to current home loan products. As such, you need to do your homework by finding out what the terms are, as they become available, seek independent advice, talk to the bank and more importantly consider your own finances too in order to be eligible and have a real chance in making your dream of owning a home to become a reality.

This is only our own view and we recommend that you seek expert advice that is suitable to your own circumstances as our opinion should not be relied upon. We take no responsibility for reliance on this information.

 

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