Long-term loan for the purchase of real estate

Buying real estate is one of the smartest investments you can make in the long run. The value of real estate will rarely decrease as the years go by; rather, they are far more likely to increase in value or, at the very least, stay the same. However, the sheer value of the funds required for buying land and/or property means that it remains a dream for many people, no matter how much their income might be. Costing several millions of rupees at minimum, purchasing real estate always requires some form of debt financing in order for it to be a viable investment. Luckily, there are numerous service providers offering credit facilities specifically for this purpose. In fact, you are likely to be inundated with the different options available to you that you might not know where to even start.

Where do I start?

Once you have decided that you are definitely going to purchase real estate sometime in the near future, your first step should be to simultaneously look for suitable properties as well as start preparing your finances. Once you find the perfect house/land/building/apartment, you should be able to make an offer on the spot and complete the transaction to ensure that you secure it before a competitor does.

Some of the types of real estate that you might need to borrow money in order to finance are:

• Purchasing or building a house
• Empty land
• Various types of buildings
• Condominiums, flats or apartments
• Sometime even renovations and home improvements
• There are even loans to help you re-configure an existing credit facility that you might have fallen behind on

Selecting a lender

When it comes to financing your purchase, there are a variety of lenders for you to select from. Most banks and financial institutions offer different kinds of home loans, with various payment terms, interest rates and loan values. There is also a growing market for online loans in Sri Lanka that have proved to be extremely effective when used to finance large purchases.

Ideally, the first thing you should do is approach various lenders; start with a simple Google Search to generate a list of options. This list would probably consist of all the major banks and financial institutes. Next, you should approach them and get the following information from each one of them:

1. Their interest rate
2. How much you are eligible to borrow from them
3. Repayment period and terms
4. Any other benefits offered by them

Once you’ve done this, don’t be afraid to get recommendations from your friends and colleagues. Their point of contact at these companies might even be able to offer you a better deal than what was initially offered to you. Certain service providers even have special packages for various professions, such as university staff, government workers, doctors, military personnel etc.

What are my loan options?

There are generally two types of ways you can borrow money to finance your real estate purchase: a normal loan, or a mortgage.

Loans

A loan is when the lender gives you a sum of money which you need to repay within an agreed-upon time period (sometimes of up to 25 years for larger loans of this nature), with an interest payment on top which acts as the lender’s fee for providing this service. This is the most basic type of credit facility in Sri Lanka. There is a new and innovative type of loan which are payday loans that can help you solve your day to day financial problems. Such a company that helps in such cases is OnCredit.lk.

Mortgages

Mortgages are slightly different. In layman’s terms, the lender will outright purchase the item you need money for (in this case, real estate; but it applies for vehicles as well) and you would need to pay the lender the value of the item, as well as the interest over the agreed-upon time period. The benefit of mortgages over a general loan is that the interest tends to be lower as the lender has more collateral in this arrangement. If you fail to repay the mortgage, they will reclaim the asset and recover their money by selling it off to a buyer. Mortgages are also commonly known as leases in Sri Lanka.

How much can I borrow?

If you are a salaried employee or a businessman (basically bringing in some form of income on a regular basis), you will be eligible to borrow money from a lender. However, this amount depends on a number of variable factors, such as:

• Your level of income
• Your social standing (level of education, place of employment etc.)
• Any outstanding debt, loans or lines of credit (including overdrafts and credit cards)
• Past loan history (completed loans and rejected loans)
• Your overall credit rating
• How much you are contributing as a deposit
• Relationship with the lender (if you’ve been a customer of theirs for longer, you are more likely to get approved for a loan)

If you manage to meet the above criteria outstandingly (and depending on the selected service provider) you may find that you can even borrow up to more than one hundred million rupees, repayable for up to twenty five years.

What do I need to prepare?

While the list of documents you need to prepare to apply for a loan depends on your lender of choice, the following are some of the most commonly-required documents:

1. Filled-out loan application form
2. National Identity Card
3. Last three months’ salary slips
4. Letter from your employer stating your designation, salary and length of employment
5. Certificates of Educational / Professional Qualifications

Once you have successfully submitted your application, it might take anywhere from a few days to even a few weeks for your loan to get approved and for you to get the money deposited to your bank account. Thus, it is always best to start securing your finances well ahead of completing your transaction or else you might risk your ideal real estate being sold to another party who was able to make a down payment faster than you were.

Things to look out for

Although the above seems pretty straight-forward, you might find that you hit some snags along the way. Here are some things you need to watch out for when applying for a home loan:

• A lender will not lend you the entire sum required; most service providers lend up to a maximum of 75% of the value of your required asset. You would need to find the remaining 25% from elsewhere.
• Watch out for floating vs fixed interest rates during application; select whatever is most suitable for you because even though you can change it later on, there is a substantial service charge involved.
• Inquire upfront about any other fees involved such as compound interest, late payment fees, service charges, processing fees.

Conclusion

Almost everyone funds their home or other real estate purchase through some form of loan. While it is a massive financial commitment, it is somewhat of a rite of passage of adulthood. With a bit of careful planning and by selecting the most trusted lender, you should be able to make your dream of owning real estate a reality.