Purchased your dream home and just received your home loan Letter of Offer (LO)? Do copious amounts of jargon in the LO confound you? Many times, different banks use different terms, but they mean the same thing.
Explore our comprehensive glossary that will help you break down the various jargons in the Letter of Offer.
1. Letter of Offer
A Letter of Offer (LO) is a contract that states the terms of the loan package offered by the bank/financial institution after approval of the loan application.
It includes the loan amount, the loan tenure, the interest rate, the repayment mode, etc.
2. Availability Period
The loan has to be disbursed within a specific period (I.e: 6 months from the Letter of Offer).
The availability period is a set period which you may draw down the loan, be it for refinancing or new purchase of a property. Otherwise, a cancellation fee will be chargeable.
3. Partial Capital Repayment
Partial capital repayment refers to making the principal repayment before the maturity of the loan.
While making partial repayments to your capital can shorten your repayment period, you’ll need to give your bank a heads up, and clarify any fees attached to the loan.
Here’s a table sharing the different stages, notice period and applicable fees for a partial capital repayment arrangement.
| Stage | Notice period | Fees |
|---|---|---|
| Outside the lock-in period | 1-month notice given | No fee payable |
| Outside the lock-in period | 1-month notice not given | Fees payable – 1-month interest-in-lieu |
| During the lock-in period | 1-month notice given | Fees payable – 1.5% penalty fee on the repayment amount |
| During the lock-in period | 1-month notice not given | Fees payable – 1-month interest-in-lieu + 1.5% penalty fee on the repayment amount |
4. Full Redemption
A full redemption means making the repayments before the loan’s maturity date. Similar to the partial capital repayment, you’ll have to notify your bank of the full redemption or risk paying a fee.
Here’s a table sharing the different stages, notice period and applicable fees for a full redemption arrangement.
| Stage | period | Fees |
|---|---|---|
| Outside the lock-in period | 3-month notice given | No fee payable |
| Outside the lock-in period | 3-month notice not given | Fees payable – 3-month or prorated interest-in-lieu |
| During the lock-in period | 3-month notice given | Fees payable – 1.5% penalty fee on the outstanding loan amount |
| During the lock-in period | 3-Month notice not given | Fees payable – 3-month or prorated interest-in-lieu + 1.5% penalty fee on the outstanding loan amount |
5. Cancellation Fees
If you have signed and agreed to take out the loan, but decided to cancel the loan right before loan disbursement, you’ll be charged a cancellation fee.
Banks usually charge a cancellation fee ranging from 0.75% to 1.5% of the loan amount cancelled. You may also be charged a processing fee.
6. CPF Usage
CPF Board has to approve the amount of CPF that can be used to fund the property purchase. This amount has to fall within the CPF Housing Withdrawal Limit. If a mortgage loan is taken up, a copy of the LO must be submitted to the CPF Board.
7. Contract Details
Contract details include the terms of the loan package such as the loan amount, the loan tenure, lock-in period, legal subsidy, cash rebate, clawback period.
8. Deed of Rental Assignment
The deed of rental assignment only pertains to properties that have been rented out. Should there be a loan default, the bank has the first right over the rental proceeds.
9. Interest Commencement Date
The interest rate will begin 3 months from the Letter of Offer’s date, or upon the first loan disbursement of the home loan.
If you’re taking a 24-month fixed-rate package, and your mortgage loan is disbursed after 3 months (in the 4th month), you will technically only enjoy 23 months of the fixed-rate package.
10. Interest Reset Date
Any early partial or full prepayment to the mortgage loan can only be made on a specific date – the interest reset date. Otherwise, a 1.5% penalty fee will be chargeable.
11. Legal Subsidy or Cash Rebate
Banks offer legal subsidies or cash rebates for property owners who are refinancing their home loans. However, the subsidy or cash rebate does not apply to those who are purchasing a new property.
Typically, there’s a 3 years clawback. This means that the bank will take back the full legal subsidy or cash rebate if full repayment is completed within 3 years of the loan disbursement.
12. Lock-in Period
The lock-in period is a specific period that you have to commit to the bank for your mortgage loan. It can be anywhere between 1 to 5 years, differing from the various mortgage loan packages signed up.
During this period, you’re not allowed to switch to another bank. If you’re forced to redeem your loan in full during the lock-in period (e.g. sale of the property), the bank will usually levy a penalty of 1.5% of the loan amount redeemed.
12. Reimbursement Fee
You’ll have to repay a sum of money should you wish to pay off the entire loan before the specified period.
This sum of money would include subsidies that the bank has given when you take out the loan. These subsidies may comprise of legal, valuation, fire insurance subsidies and/or cash rebates.
13. Top up / Margin call
In the event of a recession or any unforeseen circumstances that may cause the property’s market value to decrease sharply, the banks have the authority to precipitate a margin call.
This is because a decrease in valuation would result in a higher loan-to-value (LTV) ratio. The bank would thus order you to top up the difference in loan.
14. Valuation
Banks grant mortgage loans based on the market value of the property indicated by a licensed valuer.
The borrower usually pays for the valuation fee. This applies to mortgage loans for both Purchase and Refinancing.
We hope that this glossary has helped you decipher the various jargons in the Letter of Offer. Want to learn more property jargons? Read them here.
Have more questions regarding your mortgage loan? Feel free to contact us for a chat. Here at FinanceGuru, we seek to help you better prepare for your finances and the upcoming milestones in your life. Get a non-obligatory assessment and loan product recommendations here.
