Saving to buy land
Oran Hall, Personal Financial Adviser
QUESTION: I am a 24-year-old subsidised teacher who is now in my final year of teacher training college. I would love to start saving towards a loan to purchase land. At this minute, I am earning $36,900 after tax. I am seeking your advice in order to make my first step.
FINANCIAL ADVISER: You can obtain a loan to purchase a housing lot from the National Housing Trust (NHT) and the major building societies, but, whereas NHT beneficiaries must be contributors, borrowers do not need to have accounts with the building societies prior to applying for a loan.
Once the individual has pre-qualified for a loan and the process of getting the loan has started, the individual is required to establish a relationship with the building society by opening an account. An account is useful for, among other things, lodging funds that are required for paying the relevant fees.
The primary basis for a loan from a building society is the ability to repay the sum borrowed. Depending on which building society you approach, the required debt service ratio may be 40 per cent or 45 per cent.
The debt service ratio is the percentage of your debt payments to your gross declared income. Your gross declared income need not be only your salary from employment.
The maximum sum that can be borrowed to buy a residential lot is 75 per cent of the purchase price. For both major building societies, this ceiling applies to land that has access to road, water and light, but, in the event that one or more of these is absent, one building society reduces the maximum to 50 per cent.
Building societies allow joint mortgages, but the names of both borrowers must be registered on the title. If you need to and can afford to borrow more money, you may source additional lending from an institution that is willing to enter into a Joint Finance Mortgage with the NHT.
In this case, the 75 per cent ceiling is inclusive of the portion from the NHT.
Mortgage lenders tend to require that loan repayments are made by salary deduction and both major building societies lend at 9.29 per cent, but this rate is subject to change.
Although both building societies lend to borrowers who are 18 years old or older, there are important differences. One allows a repayment term of 40 years depending on the age of the borrower and lends to persons up to 70, but with a repayment term of five years. The other lends for a maximum of 20 years to buy land, although it lends for 25 years to buy a house. This 20-year limit applies to persons under 40 years of age.
Contributors to the NHT may obtain a Housing Lot Loan to purchase land from private individuals or companies. This loan is a Non-Homeowners' Loan, that is, a loan for individuals who do not already own a home and have never obtained a loan from the NHT.
You may apply as a single individual or join with another qualified contributor to access a higher loan limit to purchase the residential lot.
It is important to save to accumulate funds to cover your closing costs and to make your deposit. You should note that the lending institutions lend a smaller portion of the purchase price for land than they do for a house. Therefore, it is critical to secure the deposit.
Income is critical. If your income is small, you will not be able to borrow a large sum and this will limit the size of the lot you can purchase and where you can buy. To be able to convince the lenders that you can service your debt, you will also need to maintain a low level of debt.
Your income will improve when you are qualified as a teacher and thus enhance your chances of borrowing a reasonable sum, but you should begin to budget tightly immediately to raise your savings and control debt.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. email@example.com.