16 Vital Facts You Need to Know Before Applying for a Housing Loan in Sri Lanka
The rising population growth across the world has increased the need for housing day by day. People are either on the lookout for houses within their budget range or are flipping through housing loan scheme pamphlets to build their own. In fact, unlike what most people claim, the demand for property in Sri Lanka is still on the rise despite the pandemic. With repatriation in progress and developers offering discounts, this demand is only expected to continue increasing. This is when you need to consider applying for a housing loan.
Housing loans are a growing facility offered by commercial banks at highly competitive rates. Banks customize their policies, simplify the mortgage loan process, shorten the approval period and even increase the eligible age to apply for these loans. However, it is only when you have to repay this debt that you realize you should have chosen wiser.
With interest rates going down to its lowest rate in 6 years, now is the best time to apply for one. In fact, using a housing loan to invest in real estate is much more profitable than saving money through a fixed deposit.
The average usual 5-year rate for a fixed deposit is 6.5%. However, the ROI on a property increases beyond this with time. According to LankaPropertyWeb’s data, investing in property would give you 22% of an overall average price increase in the Sri Lankan property market. Whereas Sri Lanka’s overall residential land price increase is 26%. (Q3 2019 – Q3 2020).
But with all the offers and easy payment schemes provided by banks for housing loans, we recommend that you carefully think through your options before selecting one.
Here is a list of some housing loan schemes offered by banks in Sri Lanka and what to consider when selecting one.
- Housing loan rates in Sri Lanka and bank charges
Besides the capital amount obtained for a housing loan, banks charge an interest. The rate for it may be on a floating or fixed basis with percentages varying based on the bank.
Floating or Variable housing loan rates fluctuate based on the cash rate and economic state of the country. Because of this, while there is a risk in choosing this interest basis, the rates are usually lesser than a fixed interest rate loan. Certain banks also offer additional facilities like extra repayments, redrawing facilities, etc.
When selecting the ideal loan, compare interest rates between different banks. Visit them in person or research on platforms like LankaPropertyWeb’s housing loan comparison page and decide on the best one for you and use a home loan calculator to find out what your monthly repayments will be.
Make sure that you also consider bank charges. This is because certain banks charge higher additional fees that is more than the actual capital and interest combined. However, since such information may not always be publicized online, it is recommended that you visit the bank in person.
- Credit score for a housing loan
Your credit score determines your ability to repay a loan. Banks consider this report (CRIB Report) an essential part of gathering information on you. This score fluctuates due to various factors including your credit card history and shows your creditworthiness. To maintain a positive score, you need to be extra cautious of what you sign up for financially, your credit card repayments, etc. The lower the score is, the lesser chances you have of obtaining a loan.
However, now that you can submit a request to your bank or visit the Sri Lanka Credit Information Bureau in person to get your individual credit score, you can easily identify and minimize payments and other costs negatively affecting this score. All you have to do is download the application, forward it to the Bureau in person or through your bank, and the iReport will be mailed to you.
To download the application, click here.
The amount you can borrow as housing loans differs based on the packages offered by the bank. When selecting a limit for this, consider your affordability and the amount required. Although the repayment period for a home loan can be extended up to 20 years or more, the amount that accumulates towards the end may increase. If there are any deferments throughout the years, the cost you have to bear may increase further.
The minimum salary needed to apply for a loan is Rs.25,000 and the total monthly loan repayment amount should not exceed 40% of the monthly income.
- Loan period
The loan repayment period offered by banks varies from one to another. While most banks allow you to make payments within 15-20 years, others may extend it up to 25 years. Of course, this depends on the bank. So when you are selecting a bank, consider the repayment period as it has a direct impact on your loan in case of a deferment.
The age of the borrower is another factor reviewed by the bank when approving a housing loan. Generally, the borrowing age for customers is from 18 to 60 years, but some have a limit of 55. Certain other banks also require you to obtain general insurance when signing up for a housing loan. This is to reduce the risk the bank has to bear by extending their funds to you.
- Different interest rate types
A Variable Interest Rate loan is a loan where the rate of interest charged on the outstanding balance varies as market interest rates change. The interest charged on a variable interest rate loan is linked to an underlying benchmark or index, such as the Sri Lanka Inter Bank Offered Rate (SLIBOR) and Average Weighted Prime Lending Rate (AWPR). For foreign currency loans, Sterling overnight index average (SONIA) previously known as London InterBank Borrowing Rate (LIBOR) is used. As a result, your installment payments will vary in predetermined intervals.
In Fixed Interest Rate loans, the interest rate charged on the loan will remain fixed for that loan’s entire term regardless of the market rate fluctuations. This will end with your payments being an equivalent over the entire term. Whether a fixed-rate loan is best depends upon the rate of interest in the market when the loan is taken out and during the duration of the loan.
When the loan is fixed for its entire term, it remains at the prevailing market rate of interest. If interest rates are relatively low, but are on the brink of increase, then it’s better to lock your loan at a fixed rate.
Depending on the terms of your agreement, your rate of interest on the new loan will stay the same, albeit interest rates climb to higher levels. If interest rates are on the decline, then it is better to possess a variable rate loan.
Average Weighted Prime Lending Rate (AWPLR) is published weekly by the Central Bank of Sri Lanka based on the information provided by licensed commercial banks regarding lending rate offered to their prime customers during that week. These loans are granted by licensed commercial banks, usually on a short-term basis.
- Document required to apply for a housing loan
- Details of income.
- Title Deeds, Extracts (Paththiru) and approved Survey Plan (drawn within last 10 years).
- Nonvesting, Ownership, Street Line and Building Line certificates from local authority.
- Tax receipts for the last quarter and Assessment Certificate (Waripanam) from local authority.
- Bill of Quantities (BoQ) (if building a house).
- Approved condominium plan, tripartite agreement with power of attorney favouring the bank (if buying a condominium).
- Copy of NIC (National Identity Card) or Passport.
- Last 3 months’ salary slips by the company.
- Letter from your employer confirming your particulars.
- Statements of bank account (s) to which the salary was remitted during at the last 3 months.
- Details of any other loans that you currently have.
- Marriage Certificate (for joint applicants)
- Repayment Method
Many banks offer their borrowers two options to consider when paying loan installments. They are the equated balance and reducing balance methods.
In the Equated Balance method, which is also known as the Equated Monthly Installment (EMI), the borrower pays the same amount of monthly rental throughout the loan term. This is the sum of the principal loan amount and the interest on the principal, which is then divided by the number of years. This provides the borrowers an understanding to budget their finances as to how much money they will need to pay each month for their loan.
In the Reducing Balance method, the loan principal is divided by the loan term and interest is calculated on the remaining loan after reducing the monthly principal payment. Here the borrower has to pay a higher monthly installment at the earlier repayment periods than the equated balance method. However, the monthly installment will reduce in the latter part of the loan term. If you sum up the total monthly installment payments (principal + capital) in the reducing balance method, it is generally lower than the equated balance total installment payments.
Here are a few other commonly asked questions on housing loans.
- What is Remortgaging?
A re-mortgage is when you switch from your current mortgage to another product. This is where you will replace your existing financial agreement on the property, either with your existing lender or a different provider. In most of the cases, a re-mortgage is done to get to a better rate or to get additional funds.
But there can be drawbacks in remortgaging. Extending your loans to an extended time frame may increase the overall cost of the facilities. When a property is used as collateral, it can be repossessed if you cannot keep up with the loan commitments. There can be fees attached to re-mortgages by the lender which may counter any of the benefits you might receive from negotiating a lower rate on your loan. Further, the remortgage process may take a long period to complete.
People also choose to remortgage property with the intention of releasing some equity that they own. Home owners borrow funds against their property by remortgaging and claim a lump sum at once. These are then used on home improvements that increase the property’s value further. This is known as remortgaging to release equity.
- What is Loan against property?
A loan against a property is where a borrower obtains a loan from the bank by keeping his or her commercial/residential property as a collateral. This is also called a secured loan because the security of this loan is the property that is owned by the person. The interest charged on this type of loan is offered on a fixed and variable basis ranging from 8.5% to 12.5% with other conditions differing based on the bank.
- Can expats and foreigners apply for a loan?
Local commercial banks only allow housing loans for Sri Lankans, expat Sri Lankans, and Sri Lankan dual citizens.
Non-Sri Lankan foreigners can’t apply or get a housing loan from a local commercial bank.
- Can Sri Lankans apply for a loan in foreign currency?
Yes. Sri Lankans working abroad can apply for a housing loan in a foreign currency and repay in the same currency. But the policies applicable to this loan may vary depending on the bank. Some require you to be employed abroad for over 2 years, while others want you to show proof for a future contract of 1 year or have an income individually or jointly with your spouse.
Because of this when you are selecting a bank to apply for this loan, make sure you read through the conditions carefully. According to the exchange control act, the loans should be repaid in foreign currency and in the event of the loan being in arrears for over 3 instalments, the bank should recover the loan from the balance in the borrower’s foreign currency account. Further, under no circumstances, should the borrower be permitted to settle any outstanding balance of the loan in rupees.
- How do I get a loan through the EPF Guarantee scheme?
You can get a housing loan guarantee from the EPF to apply for housing loans in Bank of Ceylon, Peoples’ Bank, SMIB, HDFC and any branch of a rural cooperative bank. However, the eligibility for the scheme may vary based on the person and his or her contribution to the account.
Active members are eligible for 75% of their balance in one or more of their EPF accounts, inactive members who have not contributed throughout the preceding year are eligible for 50% of their balance and those who are married or having children who are contributing to the account can get a combination of funds in both accounts. But here the amount depends on the person’s credit score.
- A member should obtain 2 housing loan application forms from the nearest Labour Office or download from the website and send them back, duly filled, to the same Office.
- The Labour Department will check the forms and forward them, based on the information provided in the application, to the EPF Department.
- If the application is accepted, a certificate will be issued indicating the amount approved. This will be sent back to the relevant labour office.
- The loan can be obtained by producing the certificate to the preferred lending institute.
- For more visit http://www.epf.lk/housingloanguarantee.php
- How do you reduce your monthly payments after a rate revision by the banks?
If the current market rates are significantly below the contract interest rate, you may request for a rate revision even if your loan interest is on a fixed rate. But this is under the sole discretion of the bank.
- What happens if you sell your property before the completion of repayment?
If the property has been taken as a loan collateral by the bank, the borrower cannot sell the property without informing the bank. If you want to sell a property which is a collateral, first you should inform the bank branch where you obtained the loan, about your intention. You can either settle the loan by yourself or you can ask the buyer to pay you through the bank where the bank will recover the dues along with early settlement fee and any other bank charges. The bank will then remit any balances to you.
- Who is eligible to apply for a loan under the professional category?
- Medical Officers registered with Sri Lanka Medical Council
- Chartered Engineers, Chartered Architects
- Chartered Accountants (Members of CA Sri Lanka/ ACCA / CIMA-UK)
- Attorneys at Law, Software Engineers
- Pilots licensed under Air Navigation Act
- Navigation Officers (Marine Officer/ Deck Officer)
- Researcher or Senior Academic (recognized as an accredited professional) are eligible for a reduction of 0.5% from the published Floating & Fixed interest rates
- Things to check in a housing loan agreement before you sign it
- Repayment term
The ‘repayment term’ is the period from the starting point of the loan to the final due date of the loan transaction.
- Delayed payment policies
The bank will send you 3 notices prior to legal actions, first and second letters will be reminders. Third one is to notify you that the bank will take legal actions if the dues are not paid.
- Interest Rate Type (Fixed or Variable)
Fixed Interest Rate offers the borrower a predetermined fixed interest percentage to pay back over the loan period. By agreeing for a fixed interest rate, the borrower will not get affected by the market rate fluctuations. However, if the rates go down in the future, the borrower cannot take advantage of the lower rates.
Interest based on variable rates will depend on the currency type of the loan the borrower obtained (SLIBOR/ LIBOR). Market rate fluctuations will affect the repayment of this loan and the bank will mention the base value plus the bank premium in the loan agreement.
- Repayment Type (Equated or Reducing)
Check whether the repayment term you agreed with the bank is mentioned in the loan agreement.
In the equated method, your loan principal and interest charge will be distributed equally throughout the loan term. The bank will also mention the monthly instalment amount that you need to pay on the due date.
If you have selected a reducing balance method of repayment, your interest due is calculated by reducing the loan principal repayment from the initial loan value. Sometimes the bank will annex the repayment schedule to the loan agreement, or else the bank will mention only the 1st month installment and any payment beyond that should be less than that.
- Early repayment penalty
Early repayment penalty is a fee you may be required to pay to the bank if you pay off a loan or mortgage before the scheduled term of the credit facility. Usually this charge is around 5% of the capital.
- Fixed term interest rate conditions
If you opt for a fixed interest loan, the loan interest rate is fixed for loan facilities for up to 5 years. However, long-term loan facilities such as 20-25 years may carry fixed and floating interest rates.
- The option to negotiate a lower rate after the fixed term ends.
You have the option to re-negotiate the rate after the fixed loan term. But this is up to the bank’s discretion whether to accept the request.
Banks may charge a nominal facility handling fee, and this may also vary according to the loan value.
- Penalty for missed or late payments
Usually, the bank will debit your savings/current account for the monthly loan instalment, where you have to maintain sufficient funds to repay dues on time. If you couldn’t honour the dues on time, the bank shall impose a penalty (usually a% on dues). Further, the bank reserves the right to demand repayment whenever deemed necessary. If you continuously fail to pay the loan instalments, after giving you notice, the bank shall repossess/seize the collateral to recover the loan.
Housing loans offered by banks
HNB Home Loans
Housing loans offered by HNB are of 3 types; Ekamuthu Home Loans that is a joint loan for parents and children, Foreign Currency Home Loans for expats, and housing loans under a Tripartite Agreement. Here the bank also offers financial assistance when purchasing apartments besides funding the purchase of properties and making renovations. These loans are approved within 3 working days and offer flexible and longer repayment options.
NSB Housing Loans
NSB offers housing loans not only for construction and purchase of a house or land but also to complete a half-built home, renovate an existing home or to redeem an existing housing loan taken from elsewhere. They offer these schemes to Sri Lankans who are permanently employed, self employed, an expat or a taxpayer.
These housing loans available are of different categories. NSB Express Housing Loan is offered as a quick housing loan scheme with approval granted within 4-10 business days, NSB Alankara Housing Loan covers expenses of enhancing the beauty of your home, NSB Ithurum Nivasa is for irregular income earners and NSB Rata Ithuru is a housing loan in Sri Lanka for foreign workers.
Commercial Bank Housing Loans
Besides offering a loan to buy a house and build one, Commercial Bank also allows you to settle an existing housing loan using the funds offered by the bank. They extend funds to purchase lands and apartments as well, with approval granted within 3 days. You have up to 20 years to repay and the bank provides special discounts of 35% for building materials like roofing sheets, bathroom fittings, wood care products, etc. To be eligible for this, you need to possess a regular monthly income of at least Rs. 25,000 individually or jointly with your spouse.
Commercial Bank is also one of the few banks that offers professional specialized housing loan schemes as well. This covers medical officers registered under the Sri Lanka Medical Council, Chartered Engineers, Architects and Accountants, Lawyers, Software Engineers, Pilots licensed under the Air Navigation Act, Navigation Officers, Researchers and Senior Academic Professionals.
Standard Chartered Bank Housing Loan
Home loans offered by Standard Chartered Bank allow borrowers to apply for housing loans up to Rs. 50 million and 75% of the property’s value. You have a maximum repayment period of 20 years for home loans and 15 years for Equity loans. Interest for this loan is offered on a fixed and variable basis where the first year is on a fixed basis and every year after that is variable.
SCB also allows you to repay loans obtained from another bank through their housing loan. The maximum age allowed for this loan is 60 years and repayment can be made until the borrow is 65 years.
People’s Bank Housing Loan
Jayaniwasa Housing Loan scheme offered by People’s Bank is designed for salary earners with a steady monthly income. The scheme offers loans to remodel houses, purchase houses, build a house or purchase land, with a repayment period of 20 years.
People’s Bank also provides personal loans that can be used for housing and is customized based on selected occupations. The bank grants loans up to Rs. 2 million through the Pahasu Loan Scheme for those with steady monthly incomes, businessmen and self-employed individuals. The Gurusetha Loan Scheme for teachers of public and private schools and institutions and the Suwasewana Loan Scheme for health sector employees offer funds up to Rs. 2 million as well.
For medical officers, specialists, consultants and administrative and internship officers, the GMOA/GDSA Loan scheme offers funds up to Rs.10 million for personal or housing purposes. Loans are extended to aspiring professionals as well through the professional loan scheme. For expats working in high employment jobs, the bank has introduced the Dream Loan Scheme with no upper limit for housing and flexible and easy loan terms.
Seylan Sirinivasa Housing Loan
Seylan Bank offers home loan funds between Rs. 500,000 – 100 million, along with advisory services, to be resettled within 25 years. This loan is granted to salaried employees, Sri Lankan expats, professionals, businessmen, joint borrowers with a spouse and parents with children above the age of 18. Funds can be used to purchase, construct, renovate or extend a house, purchase a condominium or land or even redeem existing home mortgage loans. A unique feature of this loan scheme is that special reduced interest rates are available depending on the salary assignment of permanent employees.
HDFC Bank Housing loans
HDFC Bank has a range of housing loans offered for different customers under different categories. The VIP loans with a repayment period of 5 years and a fund limit of Rs. 5 million is offered for qualified professionals including Chartered accountants and insurers, engineers, lawyers, bankers, quantity surveyors, civil administration officers, doctors and architects. The Sharama Udana loan scheme grants funds for EPF members up to 75% of their EPF fund.
The Kedella loan scheme is extended to salaried employees, agricultural income earners, business and self-employed individuals, rental income earners and fixed income earners from an authorized source. The loan amount offered is from Rs. 50,000 and upwards and the repayment period varies based on your age. Under this scheme 70% of the sales value is granted when purchasing a house, 80% of the forced sale value of the property and BOQ for construction and 70% within Municipality limits and 60% within Pradeshiya Sabha limits when purchasing building blocks.
Situ Sevana offers funds to build, extend, complete or purchase a house, purchase a land, redeem a housing loan or to obtain water, sanitary and electricity facilities. For a special fee you could also get assistance in legal matters including searches, title reports, transfer deeds and mortgage bonds, technical details of construction from bills of quantity, inspections for conformity Street line, etc. The minimum loan amount for this scheme is Rs.1 million and can be obtained by private individuals, joint owners or parents along with their children.
HDFC bank also offers home loans for internal and external repairs, other structural improvements like Painting, Waterproofing and Roofing, Plumbing and Electrical Works, Tiling and Flooring, Grills, Aluminum Windows compound walls and more. Through the Sisira Home Loan scheme you can invest in furniture and on other household utensils as well. Funds are granted up to 100% of the total estimated amount with a minimum of Rs. 30,000.
DFCC Housing loan
To obtain a housing loan from DFCC Bank you need to be a regular monthly income earner of Rs. 30,000 or above. However, the bank grants the maximum amount for this scheme after considering your repayment capabilities and Forced Sale Value (FSV) of the property as stipulated by them. In case of construction of a House, the bank allows a maximum borrowing of up to 75% of the value of the Bill of Quantity (BOQ). This loan is repayable within 20 years and depends on the age that you retire. Through this loan, just like the previous schemes, funds are granted to purchase, construct, extend, complete, renovate or build a house, purchase a condominium or a plot of land.
BOC Housing Loans
Bank of Ceylon offers housing loans in 2 categories. A general housing loan scheme for BOC Customers, Sri Lankan citizens between 18-60 years with an adequate repayment capacity with clear DRU and CRIB Records and Limited liability Companies (House Constructors for sale) and university staff.
The loan amount for the general housing loan scheme depends on the repayment capability of the customer while the maximum age for borrowing this loan is 65. The housing loan scheme offered for university staff members has 2 conditions for which the facility is offered. For those who are a part of the academic staff board, funds are provided up to 2 million while non-academic staff are offered Rs.1 million. However, in order to be eligible for this loan facility, a minimum service period of 5 years should be met and they should be working in universities registered under the Universities Act No: 16 of 1978.
Cargills Bank Housing loan
Cargills Bank offers home loans for salaried and self-employed individuals between the ages of 18 – 55. Salaried employees need to have a minimum gross salary of Rs. 30,000 and self-employed individuals should show a minimum monthly profit of Rs. 50,000. Self-employed individuals should have also been in the business for over 3 years. Repayment period for the housing loan is within 20 years and interest payments are available on a fixed and variable basis.
Sampath Sevana Housing Loan
With 6 flexible repayment options, you can apply for a Sampath Bank Sevana Housing loan even if you are 55 years of age. The loan repayment scheme can be customized based on your requirement and has a special repayment option for professionals based on their income.
Amana Bank Housing Loan
Housing loans of Amana Bank are approved within 3 days with a repayment period of 20 years. Funds from the loan can be used to transfer an existing housing loan facility to the bank in addition to purchasing, completing, constructing and renovating a house, purchasing land and refinancing the costs of building your home. Repayment is customizable, and facilities are also available for self-employed individuals and expats.
There many banks that offer different housing loan types with a range of conditions and charges. But it is up to you to find those that are the most favourable and collect all information required to get your loan approved within the minimum period.
For more details, you can visit our Home Loan Comparison page with information on housing loan products offered by different banks and their rates.
*Disclaimer: Housing loan policy information included in this article has been obtained through respective bank websites and are in no particular order. Conditions may be subject to change.
Posted Date: 5th November 2020