Property (Mortgage) - Definition and Types of Mortgage Financing

1. Finance is the study of the process, institution, market and instruments used to transfer money and credit between individuals, business and governments

2. Mortgage financing plays important role in property development which broadly divided into:

a. Financing project

b. Financing the end user or buyer property buyer

       i. What is project financing? - The management of adequate funds to finance the construction or development of a specific project.

         ii. Loan arrangement in which the repayment

3. There are three types of mortgage financing which are as follows:

A. Stock finance - at early stage of development

i. Stock finance referred as Pre-Bridging Finance or Pre-Development Finance. 

ii. The finance is based on land property.

iii. It is paid after a progress of stage is completed.

iv. One of the financial institutions which are willingly to give the finance is Agro Bank.

v. It is essential for financing the purchase of land.

vi. This type of finance is of limited scale, high interest rate and is rather selective because of the high risks involved.

vii. This is the reason for why many financial institutions are unwilling to grant long term loan to the developer at the initial stage of a project.

B. Bridging finance - for development

i. A term implies that a fund required to bridge the shortfall between the realization of adequate funds from partial sales of the project and the initial expenditures for construction that sales have either yet to be launched or is sufficient

ii. The finance is based on construction costs.

iii. Bridging finance means extending finance to an individual or an organization involves in the building industry

iv. Bridging finance is given only after planning approval has been obtained and expired after the construction works are finished

v. This type of finance is usually extended by financial institutions as construction loan.

vi. It is usually granted on a short term basis to finance site work construction, infrastructure and the initial stage of the main building operation.

vii. Types of Bridging Finance

      1. Direct loans

   a. These are bridging loans obtained in total amount from a single financial institutions, commercial bank or insurance company.

    b. Normally the amount of loan obtainable is small and has a low risk of failure

2. Syndication Loans

a. A borrower approaches an agent to raise a certain amount of loans and call in a few other banks or financial institutions to participate

b. Normally exercised for a very large project which involves a large sum of money

c. Usually the merchant banks will acts as agents while commercial banks, financial institutions and insurance companies becomes the lender

d. Merchant banks take commission and it does trading. It helps managing the flow of the money.

e. These banks do not care about the saving as it provides services.

f. The banks teamed up to help a big project. They will invest in term of share.

g. Usually, the merchant banks act as estate agent.

C. End finance - for buyer to purchase house

i. It is available in 2 ways:

1. Directly from the financial institutions

2. Indirectly from the financial institutions, that is through the developer

ii. End Finance is normally in the form of mortgage loans granted on a long term basis that is ranging from 10 to 30 years, maximum 65 years

iii. The property to be mortgaged should be freehold or leasehold.

iv. Margin of financing is assessed on

1. Types of property

2. Location of property

3. Age of the borrower

4. Income of the borrower

v. It is a finance given by the financial institutions to individuals in order to buy a house.

vi. Designed to assist qualified purchasers in obtaining bank loans to partially finance property purchased.

vii. Is provided once a house has been advertised for sale.

viii. Normally ranges from 70% - 90% of the purchase price, in some instances even up to 100% of the purchase price.

ix. End Finance is granted to the purchaser so as to enable them to pay in successive stages to the developer when houses are under construction.

x. Repayment of end finance is normally by equal monthly installment to cover the interest charges.

xi. The payment is comprises of interest, tax and MRTA, an insurance which is safeguarding the interest of house buyers.

xii. This monthly installment should not exceed 1/3 of the borrower household income.

xiii. The Bank Negara has kept all the transaction records of a person as it acts as a central institution.