What should I do when I decide to apply for a loan?

Anyone can qualify for a loan, provided they can demonstrate that they are able to pay the amount borrowed back over time. To determine this, the lender will evaluate the borrower’s creditworthiness.

When you initially approach the bank, the bank official should give the general terms and conditions or the information sheet applicable to the particular loan in question. The bank official will also ask you specific questions so that he can draw up a personalised offer capable of reflecting your particular requirements.

You should also be given a generic quotation – indicating the annual repayments/terms and also the documentation required to conclude the application. This initial offer will summarise the important features of the personal loan or home loan.

By gathering the different information which the different banks offer you, you will be able to compare the different offers and decide which offer best suits your needs.

Remember: When compiling all the information from the different banks, make sure that you are given an exhaustive list of ALL the charges which the bank will charge you, any notarial and architect fees which you may incur as a result of the bank requesting you to seek their services and a loan repayment schedule. In addition, make sure that you ask the bank if it will charge you any processing fees during quotation stage.

Should I opt for a short term or a long term loan

If you opt for a short term loan, you will have higher monthly payments but you will pay less in total. In the case of a long term loan, you will pay less each month but more in total, once you’ll have to pay more interest. When opting for a long term loan, you should not make financial commitments which go past your retirement age unless you are sure that you will be able to afford the payments.

Which documents will the bank require together with my loan application?

Before granting a loan, the bank will usually need proof of your income. In fact, when you place an enquiry, the bank will ask for a copy of your recent payslip. However, when processing the application for the loan the bank will need a copy of your:

  • FS3 or Profit & Loss Account;
  • Self-Assessment Form submitted to the Inland Revenue.

The bank may ask you for further information in order to assess your application.

Will the Bank always accede to any request to grant a loan?

No. The Bank will consider various issues before granting a loan.

The bank will grant a loan, only if it is certain that the amount requested can be covered. When the loan is granted, the bank will work out a plan of repayments based on your monthly income to ensure that not only the initial capital is recovered but also that interest is paid.

When issuing a loan, the bank will take into consideration matters such as unemployment, illness, invalidity and death.

Before applying for any loan or mortgage you should carefully consider your income (especially what you expect to earn in the future) and determine how much money you will have available each month after subtracting your normal expenses. A rule of thumb is that your mortgage instalment payment should not exceed one third of your disposable income, so that you will be able to meet your current expenses, unforeseen expenses, and any drops in income caused by, for example, illness and accident or job loss.

Before applying for any loan or mortgage, you must always consider whether you are taking on too much debt. You should also know that, once the contract is signed, the mortgage is recorded in a credit information system, managed by the Bank of Malta called the Central Credit Register. Banks can access the data in its archives and you can also ask to see the information recorded on you in this register.

Once I am granted the loan of a considerable amount, will the bank make any requests?

The way you choose to repay the amount you borrowed depends mainly on your financial situation and whether or not you are prepared to take risks. In Malta, when a person takes out a loan the monthly payments pay the interest and also repay part of the amount you borrowed (“the capital”). If you are punctual with your repayments, the whole loan is paid off by the end of the term.

What happens when I make early payments?

In the case of a loan, the bank will define your instalments. Therefore, the sanction letter will define the terms applicable in the case of an early repayment.

Usually, loans with a variable standard rate of interest, are designed in such a way that there are no penalties or early repayment charges. However some agreements may include a clause imposing a penalty if the borrower sells the property during the first few years to repay the loan. It is very important to pay attention as to when you decide to stop making monthly repayments and pay in full the amount of money outstanding on your loan since there is the risk of incurring penalties.

What is a Sanction Letter?

Once you decide which bank and which loan arrangement best suits your needs, the bank will assist you in the filling of the application form. When this is completed, a copy will be given to you. Once your request is approved the bank will issue a sanction letter. This will be personal to you, so it will include your name and the date.

The document will include the contract’s key features:

  • Period of validity for the offer: if the deal is guaranteed to be available for a period of time or if you have to take the loan by a particular date;
  • Type of loan, purchase price of property and any details of what you’ve asked for;
  • Description of the loan offered by the bank: rates, terms, restrictions, guarantees and security;
  • Overall cost of the loan: how much you will end up paying the bank for the amount borrowed;
  • Monthly payments: amounts and number;
  • Fees: full listing of all the fees to be paid whether legal charges or bank fees;
  • Insurances required: cheap loans may not be so cheap once you have added the cost of insurance covers;
  • Terms and conditions for over or early payments: full listing of all fees or penalties;
  • Additional features: all added extras.

Tip: You should ask your bank what impact a change in the interest rate could have on your monthly repayments. For example, if after some time you have taken a loan, the rate of interest increases, would the bank revise upwards your monthly instalments or would it change the term of the loan? And what if the rate falls?