Buying My First Home: Financial Guide for Sri Lankan millennials

Buying My First Home: Financial Guide for Sri Lankan millennials

Buying your own home or apartment in Sri Lanka is an essential element of the dreams checklist for the majority of local millennials. You can be an undergraduate, employee of a private company or government sector, entrepreneur, digital marketer, and even self-employed. Irrespective of which life stage you are at, you will one day be so focused on buying your first home. The idea of this guide is to provide you with the basic financial insights in terms of home loans and buying your first residential property.

What are the Sources of Finance?

Within a booming economy like Sri Lanka where property prices are on the rise, it could be very difficult for a millennial to pay a lump sum upfront to purchase her/his dream property. This is when the point where first-time buyers seek the assistance of the financial services industry. The government and the private sector banks are the main sources of finance for first-time buyers. This is evident by the fact that local mortgage and construction sectors have grown at a rapid rate over the past few years.

Limited company But to Let mortgages

Local economy has evolved gradually since we marked the end of the brutal 30-year-old civil-war. The individuals with low or mid-income have started shifting towards the high middle-level income category. The local banking industry have leveled up their numbers game along with these developments in the economy.

Introduction to Mortgages/Home Loans

A mortgage/home loan is usually offered as a monetary advance when someone is buying or building a residential property. The providers of home loans are the government and private sector commercial banks. The borrower is responsible for repaying the loan back to the lender on an installments basis. “As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.”

If you are buying a new home

Usually, local banks lend up to 70-75% of the property value for residential property purchases. The borrower has to deposit 25-30% of the property value using personal savings or gifted deposits. For example, when someone wants to buy a house valued at 30 Million, The borrower has to make a deposit of 7.5 M upfront. Bank will lend the balance 75% and the borrower gets the ownership of the house from the date of contract exchange and case completion.

Mortgage property Valuations

If you are building a new home

In this scenario, the lenders release the home loan in 3-4 stages. Similarly as above, the borrower has to contribute 25% of the estimated total value of the property. Lender’s portion will be released at different stages along with the inspections and valuations conducted at different stages of your development process. Adequate usage of the released funds is checked and should match with the completed development when releasing the next loan installment.

Mortgage Declines
New builds

Eligibility Criteria for Home Loans/Mortgages

There are certain factors an individual has to fulfill in order to qualify for a home loan in Sri Lanka. If you are an ex-pat or foreign citizen looking to invest in local property these criteria might differ from lender to lender. Basic requirements can be listed as below,

  • Minimum Age of an applicant is 18 years
  • Resident and citizen of Sri Lanka (Expats and foreigners also can apply for different loan schemes)
  • Stable Income: Minimum 25,000 LKR Monthly (this differs from lender to lender. For example, Commercial Bank- 25,000 LKR Sampath Bank = Monthly income exceeding 60,000 LKR)
  • Reliable credit history
  • Registered on the Voters Roll
  • Guarantors (This is something Sri Lankan home loans differ from other European countries)
  • Disclosure of other assets (applicants should disclose all their existing assets)

On top of these basic eligibility criteria, banks also have their own lending criteria and assessment of the full loan application. Banks conduct detailed searches specifically on the type of property. Further, the applicants would be requested to submit the below documents along with the loan application.

  • Proof of Income– Latest Three Months pay-slips, Letter from employer confirming employment and income
  • Evidence of current residential address- Bank Statement, Utility Bill
  • Proof of Expenditure/Income– Latest three months Personal Bank statements as proof of income and expenditure via direct debits
  • Income tax returns– For self-employed applicants
  • A copy of National Identity Card (NIC) or a clear copy of passport.

Fixed Interest VS Floating rate

Compared with other countries in the world, Sri Lankan Interest rates are extremely competitive and on the rising end. This is mainly linked to the economic situation of the country. The range of the Sri Lankan Interest rates can be from 5%-16%. It depends on the loan provider and the type of loan you are applying for. Home loan rates often indicate a fixed rate or a floating rate. While the fixed rate is fixed for the duration of the mortgage period. The floating rate tends to fluctuate depending on the market conditions.

The best practice is to stick with a fixed interest rate as our economy and banking industry is going through a quiet uncertain period especially due to the COVID-19 pandemic.

Special Features to consider when selecting a Lender

  • The Lowest Interest Rate
  • Average processing time of the Loan Application (14 days)
  • How many times do you need to visit the bank? OR Is it fully ONLINE? (A full online application is not the future, It is Today)
  • Does the Bank assist you with locating the relevant documentation?
  • SMS Updates/Online Tracking alerts at each stage of the application process (A digitally-driven Home Loan provider)

Term of the Home Loan/Mortgage

The maximum term of the loan also differs from lender to lender. Higher the term (Ex: 25 years) lower your monthly mortgage payment would be. However, it is always advisable to settle the loan within the shortest possible time period as it would save unnecessary interest payments. There are no interest-only loans for residential purposes. So, your monthly payment would consist of interest and capital components. The term of the loan would also be subject to the applicants’ retirement age. The term of the loan should not go beyond the state retirement age.

Time needed: 14 days.

Steps on how to apply for a Home Loan/Mortgage in Sri Lanka

  1. Find a suitable Property with clear title reports

    The property should be suitable for residential purposes and of good condition. An experienced estate agent can help the home buyers with this. Factors like neighborhood, land structure, development material such as Bricks, Tiles would also be considered.

  2. Discuss the financing options with a Reputed Bank

    You should consider factors like interest rate, lending and eligibility criteria, term of the loan, maximum loan amount, budget planning for monthly payment.

  3. Submission of the full home loan/mortgage application

    After determining the maximum loan amount, affordable monthly budget planner, and repayment method such as the Equated balance method and Reducing Balance Method. The average processing time of the application would be around 10-14 working days.

  4. Professional Property Valuation and site Inspection

    The bank will arrange an inspection visit to your property

  5. Releasing the Loan/Mortgage Offer

    After conducting the income assessments, credit and ID checks and other verification bank will issue the loan offer which is a detailed document consists of loan details and terms and conditions.

  6. Stamp Duty and Legal fees

    Along with the submission of the loan application, applicants need to contact a solicitor who can help with land registry and stamp duty payments.

  7. Contracts Exchange

    Once all the funding and legal requirements are fulfilled, It is time for the Contract Exchange with the vendor!

Interest Rates, maximum home loan amounts offered by leading banks in Sri Lanka

BankMaximum Loan Amount
People’s Bank
(Interest rates are subject to change based on the base rate set by the Central Bank and fixed and floating rates are updated by the banks)
No upper limit on Maximum Loan amount, up to 75% of the total purchase cost
Commercial Bank
From 500,000 LKR to 50 Million
Sampath Bank
It depends on the repayment capacity & the Forced Sale Value (FSV) of the property as stipulated by the Bank. Can borrow up to 70% of the total cost of the purchase process
Bank of Ceylon
BOC Sirimedura – Up to Rs. 25 million
Rates last updated in April, 2020

“It is the ideal time for the local Millennial population to start planning their first home purchase”

Additional reading

Differences between Sri Lankan and UK Mortgage Industry

UK Mortgage IndustrySri Lankan Mortgage Industry
Lenders’ Standard Variable Interest Rates are around 4-5%Floating is around 11%-15%
Fixed Deals available for 2,3 and 5 years at a lower interest rate of 1-2%No Mortgage Deals. The interest rate is either fixed or floating
High intervention of financial intermediaries: Mortgage BrokersLack of financial Intermediaries
Ability to re-mortgage/refinance while raising additional funds Not possible to refinance
UK Mortgage industry is much prominent than the local mortgage structure

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