What rights and responsibilities do you have when taking out a home loan?
Borrowing generally can’t be avoided. Even larger companies get a loan in order to extend or improve their businesses. Some people may borrow for other reasons, but the most common reason is when buying a home. This is because the most important and expensive investment you can ever make is to have your own house.
Between borrowing and paying, it is easier to borrow. There might be certain steps you need to do to get approved, but it is less stressful when you have to deal with the monthly payment and interests of your loan. Therefore, you have to know what the loan entails and your borrower’s rights in order to avoid problems in the future.
Can you afford it?
Before going through a loan or even before finding a loan company, you have to ask yourself if you can afford it. More so, since loan companies have different sets of rules and regulations, you might not get the exact amount of loan you want. Basically, your eligibility for a loan will be based on three things – your income, your ability to pay and your loan to valuation ratio on the property you will purchase.
Loan to valuation ratio is a risk evaluation ratio used by lending companies to determine the eligibility of the borrower. Thus, if loan companies deem that you have a high loan to valuation risk, the loan will cost you more. In most cases, you will also be required to have mortgage insurance.
You must also consider all the other financial obligations you have before deciding on a loan. Do you have the capacity to repay the loan in line with the income you have today? Furthermore, you should also consider the length of time required to pay the loan.
Choosing a lender
There are basically two types of lenders – the banks and the non-banks, such as independent loan companies or credit unions. However, no matter which type of lender you choose, you have to know your borrower’s rights first and understand how loan companies operate. This will help you make a better decision based on your knowledge and your situation.
Remember that as a borrower you have the right to be given accurate and truthful information to help you make a better decision. You also have the right to a fair and reasonable contract and the right to be compensated should you have any complaints or problems.
Once you have knowledge of these rights, it is easier to find a lender who will honour your rights as a borrower. When choosing a lender, following certain guidelines can further help you choose the right one that will complement your circumstance.
- Security and interest rates – If your loan is approved, what kind of security or collateral does the loan company require? An example of this is the title of your property in exchange for the loan. Furthermore, you should also find out what the interest rates and how are they going to be charged. Are they going to be flexible or fixed?
- Payment – You should find out how payments are to be made. Is it weekly, monthly, or quarterly? You can negotiate with the lender what type of loans and payment schemes are available that is affordable for you.
- Penalties – You should foresee possible problems that will make you miss out or unable to repay the loan. If so, what are the penalties or grace period the loan company gives for such circumstances? On the other hand, you should also ask what bonuses or rebates are available if you pay the loan earlier.
- Extra charges – Ask if there are other extra charges such as maintenance fees, stamp duty and other types of extra charges.
What must you receive from the lender?
Loan companies and lenders are obligated by the Consumer Credit Code to provide the borrowers with documents that explain your rights and responsibilities, the credit contract and the comparison rates schedule.
The credit contract that will be given to you should have the following information as dictated by the Consumer Credit Code.
- The total amount of money that you have borrowed.
- The percentage rates on a per annum basis
- The calculations and adjustments made on the interest rates
- The exact amount of the interest rates
- Other extra charges
- How you will be notified should there be any changes in the contract
- How often will you be given with an account statement
- If mortgage guarantee insurance is applicable
Aside from the credit contract, the loan company should also give you a copy of the comparison rates schedule. This will give you an idea about the total cost of your loan. It also displays various rates and terms for a particular range of loans. These numbers or amounts are specified in the Consumer Credit Code and based on a standard formula which includes the interest rates, the term of the loan, the total amount borrowed, fees and charges you are expected to pay in relation to the loan and how often you will make the repayments.
Borrowing is easy as long as you must exercise discernment and caution before borrowing. Make sure that you know your rights and responsibilities as a borrower in order to prevent further problems in the future. Moreover, you should also look at your income if you have the ability to make the repayment should your loan be approved.