Hello friends, as promised, I am back with the conclusion to the mortgage class. Last week we broke mortgage down, looking at its roots, qualification criteria, appraisal and some of the facility terms and conditions. Today we will focus on post approval matters, essentially what to look out for after the finance house has approved your mortgage request and issued you a facility letter.
Before I delve into the post approval matters, let me quickly address one of the popular questions I got by way of feedback. Yes, my good friends, you can apply jointly for a facility. The most usual of these is that by spouses which is usually evidenced by submission of a marriage certificate.
A co-applicant may not necessarily be your spouse but there has to be some filial connection or relationship. This simply means apart from your spouse, your co-borrower could be your daughter or son, but certainly not a friend or co-worker etc. When you co-borrow you can access a higher loan amount and you are both obligated to pay even if one party defaults on their part of the repayment.
Once you have that facility letter in hand, either as a single or joint borrower, you are required to execute the document and return copy to the finance house as well as fulfilling other requirements. Some mortgage or finance houses require you to pay processing and or facility fees, which usually ranges between 1-1.5 % of the facility amount.
In addition to the 20% down payment or contribution required, you are also required to make a statutory deposit towards settlement of stamp duties and registration of legal documents. Kindly note that in other circumstances you may be required to make a down payment more than 20% if your income situation allows you to only secure 60-70% of required property price. This down payment should be made directly to vendor or seller of the property in question. Another important execution is that of the mortgage deed. This deed expresses your consent to transfer your interest in the property to the mortgage or finance house in respect of the loan facility secured.
As with all transactions, there are inherent risks that should be mitigated. The usual practice is to transfer these risks to insurance companies. Hence policies like Mortgage Protection or Life Policy and Fire Insurance Policy are taken out against temporary or permanent disability or at worst, death and fire or storm affecting part or whole of the building respectively. In some peculiar cases, finance or mortgage houses may advance 100% mortgage to applicants.
In such cases the risk is very high since applicant would not have made any down payment. The mortgage house thus goes a step further to take a third cover to insure against the portion of the down payment that hasn’t been made. This is known as collateral replacement indemnity (CRI). Do keep in mind that you will pay premiums on all these policies.
Disbursement and amortization schedule
Upon satisfaction of all pre-disbursement conditions, the mortgage or finance house, once the property is ready and habitable, may disburse either the 80% or the balance of the property price after conducting an inspection and all other due diligence with respect to title and ownership confirmation. Once disbursement is made, the borrower will start making repayments in the following months.
This is where it gets tricky as some borrowers may complain about their repayments. You may have heard some borrowers complain about paying down their principal amounts yet their balances seem static and may not be reducing. Borrowers should insist on being counselled and educated about their repayment or amortization schedules as improper counselling may lead to grumbling and less commitment to meet monthly payments. Borrowers must insist on being furnished with a copy of the amortization schedule.
Borrowers, ideally, if their income status allows them, should opt for a straightforward reducing balance amortization schedule. This simply reduces the principal amount taken with the regular repayments made every month. What many borrowers don’t know or may not have paid attention to is that, the schedule is made in such a way that in the initial years of repayment, you literally pay only interest with a negligible principal payment contained in your monthly repayment amounts.
Definitely that isn’t inspiring as it may seem that the schedule is skewed in favour of the mortgage house who collects their interest first. Do not despair, there is good news as you allowed to make periodic lump payments to significantly reduce the outstanding principal balance. You are even allowed to pay off the loan, usually after 5 years though you will also have to factor in a prepayment penalty.
On the face of it, a lot goes on into taking out a mortgage to buy a house or release the equity built in your property and definitely requires strong commitment and discipline to see it through. I will hope however that, after 2 weeks of this class, you sure have a better understanding of the conditions and terms. Anything still unclear? Do not hesitate to contact me, I am at your service as always. Until next week, class is dismissed!
The writer is the Executive Director of Yecham Property Consult
& Founder of Ghana Green Building Summit.
Email: [email protected]
Linkedin: Cyril Nii Ayitey Tetteh