From House Hunting to Homeowning: Crucial Factors to Assess Before Signing a Loan Agreement

When it comes to purchasing a home without cash, the loan application process becomes a pivotal milestone in the journey. It acts as the initial litmus test, determining whether our dreams of homeownership can become a reality. Once you conquer this hurdle, you embark on the path to success. The subsequent steps involve finalizing the loan agreement and completing the home transfer, inching closer to the realization of our new home. However, it is crucial to acknowledge that the loan agreement itself harbors significant intricacies that demand our utmost attention. Today, PropertyScout has curated essential insights to ensure you are well-informed before taking that pivotal step of signing a home purchase loan agreement.

Working out the loan agreement within the given time period

Congratulations on successfully submitting all the necessary documents for your home loan application! Now, it's time to take the next crucial step: finalizing the loan agreement with the bank within 45 days from the date of loan approval. While it's worth noting that some banks might offer extended timeframes for completing the agreement, it's crucial to adhere to the specified period. Why? Well, exceeding this timeframe means starting the entire process from scratch – from reapplying for the loan to potentially facing changes in interest rates.

That's why, particularly when purchasing a home through a down payment plan, it's vital to ensure that the construction or completion of the property aligns seamlessly with the timeline for signing the loan agreement and transferring ownership rights.

What to look out for before finalizing the loan agreement

A home loan agreement contains a plethora of crucial details that require thorough understanding and careful scrutiny before entering into the agreement. This is essential to safeguard against any potential breaches of the loan agreement and to prevent future complications. Therefore, it is important to be aware of and verify the following key information before finalizing any home loan agreement:

Interest rate and Repayment conditions

Before finalizing the home loan agreement, it is crucial to thoroughly examine the interest rate, loan amount, repayment schedule, and due dates to ensure compliance with the terms of the agreement.

Interest Rate Penalty for Delayed Debt payments

Checking for any potential discrepancies in debt repayments is another crucial aspect when reviewing a loan agreement. If you fail to make timely or accurate debt payments, or if there are any delays in the payment, you may be subject to an interest rate penalty at the maximum rate stipulated by regulations. On average, this penalty ranges from 15% to 20% per annum.

Refinancing

Banks typically impose a 3% penalty fee on the remaining loan balance for early withdrawals, with a withdrawal period of 3-5 years depending on the loan package. These details will be explicitly stated in the loan agreement. Therefore, don't forget to carefully review and verify this important information.

Example: Details & Conditions

Loan Amount: 3,000,000 THB with full collateral. Mortgage fee: 1% (30,000 THB). If closing the account with cash in the 4th year, the borrower must repay the bank 30,000 THB in full without any penalty. However, if waiting until the 5th year, no penalty fees are incurred as per the specified conditions. The borrower should compare the penalty fee with the ongoing interest payment to assess if it's worthwhile to settle the debt within the 5-year timeframe.

MLR vs MRR: Understanding the Difference and Potential Adjustments

Before taking out a home loan from a bank, it's crucial to clarify whether they use MLR or MRR as the interest rate. Generally, there are two common types of home loans. However, it's important to note that the order of interest rates from highest to lowest is typically MRR > MOR > MLR. Having an MLR interest rate doesn't necessarily mean it's the lowest rate available. Another bank may offer an MRR rate with a deduction of X%, resulting in a lower interest rate than MLR (without any deduction).

Late Payment Consequences: Penalties and Fluctuating Interest Rates

If you make late payments on your loan, you may incur penalties, and the interest rate can fluctuate over time. In the case of late payments, the bank will impose penalties if you consistently miss the scheduled payment deadlines, such as at the end of each month. The bank will calculate a late charge, which is an increased interest rate on the loan. Each bank may have different calculations and varying degrees of fluctuation.

Fluctuating Prepayment fees between banks

A prepayment fee refers to the fee charged for repaying a loan before the specified term, typically within the first three years, in order to refinance with another financial institution. The prepayment fee is determined by each bank and may vary. It is important to note that this fee is unrelated to paying off the loan in excess of the minimum required amount. However, if you use your own funds to repay the loan, there will be no prepayment fee incurred.

Fire insurance requirement (life insurance is optional)

When applying for a loan, fire insurance is always required, while life insurance is optional. When borrowing money to buy a house or condominium from a bank, they often require us to have insurance, especially fire insurance, to reduce their own risk. If a fire occurs, the insurance will pay the bank. Some banks may also require us to purchase additional life insurance, as it ensures that the loaned property will be transferred in the event of the borrower's death.

However, you have the right to choose whether or not to purchase life insurance, but it may affect the loan evaluation process or come with additional special conditions if you do purchase insurance. For example, if you have life insurance coverage for the main loan amount, you may receive a one-year interest rate reduction, among other benefits.

Insurance Reduces Risks for Both You and the Bank, But You Are Responsible for Premium Payments

As mentioned earlier, banks typically require fire insurance and may encourage or assist with life insurance. Insurance is considered a benefit as it helps alleviate burdens in unforeseen circumstances. However, you are responsible for paying the insurance premiums. Typically, the premium for fire insurance is around 2,000 Baht per year, while life insurance premiums can vary from tens of thousands to hundreds of thousands of Baht, depending on the type of coverage chosen.

Joint Borrowers' Liability: What Does It Entail?

The liability of each joint borrower is equal. For instance, if two individuals jointly borrow 2 million Baht from a bank, each borrower will be responsible for 1 million Baht. If one borrower pays the full 2 million Baht, they can then claim half of that amount, which is 1 million Baht, from the other borrower.

Spouse's approval

For married couples who have completed their marriage registration, prior to engaging in any legal transactions such as sales, exchanges, consignments, lease-purchases, mortgages, mortgage releases, or transfers of mortgage rights on immovable property or immovable property that can be mortgaged, leasing immovable property for more than 3 years, or obtaining loans, etc., they must obtain consent from their spouse. This requires both parties to sign copies of their identification cards and house registration documents as evidence that the spouse is aware of the intended legal transactions. However, if the debt arises while living together as husband and wife without registering the marriage, it is considered a personal debt for which the other party is not liable and does not require consent for the mentioned transactions.

Under the Civil and Commercial Code, the management of marital property is governed by Section 1476, which states that spouses must manage their joint property together or obtain consent from the other party. Otherwise, the other party may later file a lawsuit to revoke such legal transactions. The act of 'borrowing money' is one such legal transaction that requires the consent of the spouse. This is to prevent situations where one spouse is unaware and avoids joint responsibility.

Must be for residential purposes, interest rate adjustment for commercial use

When applying for a loan, if the purpose is stated as residential use, the interest rate will be as per the agreement set by the bank. However, if the loan is intended for commercial use, such as opening a restaurant or setting up a home office, the bank perceives it as higher risk compared to regular residential use. Therefore, the bank may adjust the interest rate to be higher than the rate for regular residential use.

The bank will hold you liable for all fees and expenses

When applying for a home loan, we will be responsible for all expenses, starting from the appraisal fees, loan application fees, and stamp duties. Therefore, we need to have sufficient reserves to cover all the associated fees.

Be mindful of unintentionally breaching the contract, read the terms of breach carefully

You may unknowingly breach the contract, for example, if our business fails to succeed, resulting in financial impact, being sued, or experiencing a kitchen fire in the condominium we reside in, leading to depreciation or loss of value. If any of these events occur as described in the contract, it is often referred to as a 'Breach of Contract.' The bank will provide a specified period for rectification, but if the issue is not resolved, the bank will consider the borrower in breach of the agreement. You will be required to repay the remaining debt in full immediately. If you are unable to repay the debt, the bank has the right to take legal action against you.

The interest on principal can be calculated only after a one-year grace period in order to comply with the law

According to Section 655, it is stated that "You are prohibited from charging interest on arrears." However, when the accrued interest is overdue for at least one year, the loan agreement allows for the agreement to combine the accrued interest with the principal, and interest is then calculated on the total combined amount. Simply put, interest on principal means taking the overdue interest and adding it to the principal, and then calculating interest on the total combined amount.

The Bank has the authority to deduct funds from the deposit account in case of failure to pay debts

If the borrower defaults on their debt, and there is a set-off clause specified in the loan agreement, the bank, in this case, the same bank where the deposit account is held, has the right to withdraw funds from the borrower's account to repay the outstanding debt. This set-off clause typically states that the borrower agrees to allow the bank to deduct funds from any type of deposit account owned by the borrower, either solely or jointly with any other person, including any money or other monetary claim owned by the borrower to the bank or any entitlement to be returned by the bank, without the need for consent or prior notice to the borrower or the joint owner. The bank is not required to wait for any deposit or debt owed to the bank by the borrower to become due for payment.

Insurance Company Will Always Pay the Bank First in Case of Home Damage

Borrowers are required to obtain property insurance with the bank or another institution accepted by the bank. The insurance coverage must be equal to or greater than the appraised value of our house or condominium. The contract will specify that the bank (the lender) is the beneficiary and the sole custodian of the original insurance policy. This means that if our house is damaged, the institution with which we have the insurance will pay the bank first.

The bank has the right to request additional collateral from you at any point in time

The repayment of the loan, including interest and various fees, must be secured by collateral. The loan agreement clearly states that the lender may require additional collateral from the borrower if the existing collateral is insufficient or deemed inadequate for the loan, for any reason. If the bank requests additional collateral and the borrower fails to provide it, it will be considered a breach of the loan agreement.

The bank reserves the right to deny loan disbursement at all times

During the period of applying for a loan and before or incomplete disbursement in accordance with the loan agreement, if the bank determines that you are not eligible to receive the loan due to a deteriorated credit quality or failure to comply with the loan disbursement conditions stated in the agreement, the bank has the right to withhold the entire loan amount or a portion thereof and consider it as a cancellation of the loan. In this case, you must accept the bank's decision and will not have the right to claim any damages from the bank.

Don't forget to check the binding clauses in the loan agreement

Did you know that some banking loan packages may have specific conditions related to the loan agreement and can be exchanged for a lower special interest rate than the regular package? Therefore, when we review the loan agreement, don't forget to check the binding clauses of the loan agreement as well. These binding clauses can vary in nature, such as:

• Even though the bank provides a 1% mortgage registration fee, if you withdraw before the specified period, you will be charged a refund for the mortgage registration fee.
• After obtaining a home loan or mortgage, you may feel that the interest rate reduction from purchasing Mortgage Redemption Term Assurance (MRTA) is no longer necessary. However, did you know that if you cancel this insurance, the bank may adjust the interest rate to the normal rate without prior notice?
• Normally, every version of home loan requires Fire Insurance coverage, and the insurance premium may be collected every 3 years and must be paid according to the specified period. However, if you refuse to pay according to the schedule, the bank has the right to deduct the insurance premium from your loan account automatically.

Closing Comments

When it comes to signing a home loan agreement, it is absolutely vital not to underestimate its importance. PropertyScout strongly recommends carefully reviewing all the details outlined in the contract. In case of any doubts or ambiguous information, it is highly advisable to seek clarification directly from the bank to ensure a clear understanding. Once you've signed the loan agreement, it becomes crucial to diligently abide by the specified conditions to avoid any potential breach of contract that could lead to complications down the road. Remember, thoroughness and compliance are key to a successful and hassle-free home loan experience.

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