Property in Sri Lanka is now at a premium. The real estate market in houses, apartments, flats, and plots of land has boomed recently, and so the number of housing loans to finance purchases of houses for sale and other property for sale has increased steadily. As ever, an investment in real estate is a safe and profitable way to improve a financial position; however, not everyone has sufficient financial resources readily available for investment, hence the increased demand for housing financing, but potential buyers looking for loans should be aware of some basic facts:
Eligibility based on income, assets, obligations, credit history, guarantors, and citizenship can be complicated and may not be for everyone, but those who qualify can reap financial rewards. Commercial Bank, Bank of Ceylon, and Hatton National Bank all require a stable income sufficient to cover all essential expenses, not more than one-third of which should be for housing costs, loan repayments included.
Mortgage loan interest rates can decrease or increase without warning. Such fluctuations can drive home loan repayments up as well as down. Current annual rates in Sri Lanka are 12.5 percent for under and 13.0 percent for over 10 years.
Return on investment in a mortgage loan for a house may be worthwhile within just a few years in the current housing market, where property values are on the increase. Now may be a good time to invest for a significant return in a fairly near future.
Repayment in Sri Lanka is by two main methods: (1) by equated monthly installments of principal plus interest as a fixed sum and (2) by the principal in equal installments plus interest on the declining balance.
Documents Required for Housing Loans
Sri Lankan banks and financial institutions as housing lenders may require for home loans voluminous documentation of any or all of the following according to circumstances:
• A letter from the loan applicant’s employer stating that the applicant is a permanent employee in good standing
• A record of the applicant’s compensation over the past six months showing all deductions
• Available documentary evidence of the applicant’s other declared sources of income
• A letter from the employer agreeing to redirect some of the applicant’s monthly salary to the bank
• A certified copy of the applicant’s national identity card
• Copies of birth and marriage certificates if the loan is to spouses jointly
• If the loan is for the purchase of property, a letter from the seller consenting to its sale to the applicant for a specific amount
• If the loan is for construction of a building or if one exists on the property, a copy of an approved building plan and a bill of quantities for construction by a certifiably qualified person
• An approved survey plan of the property no more than 10 years old certifying the boundaries and the extent
• Original or certified copies of title deeds, Land Registry documents showing ownership and rights, obligations, encumbrances, or mortgages on the property.
• Any certificate of conformity issued by a local authority confirming completion of construction in accordance with regulations and approved building plans and permits granted by the local authority to construct specific projects on permit terms.
• Copies of the latest Employee Provident Fund and Pay as You Earn Tax statements for the applicant
• Copies of the applicant’s bank statements or passbooks for the most recent six months
• An Inland Revenue Department income tax certificate for the most recent three months
• Copies of tax receipts and audited accounts for most recent three years
• Rates receipts for the applicant from the most recent three months
• Business Registration Form
• A copy of any pertinent applicant ownership certificate
• A copy of a nonvesting certificate from the applicant’s local authority confirming that all assessments rates are paid up and that no vesting order has been served on the property for default.
Copies of assessment notices and receipts for taxes paid. Assessment notices indicate the quarterly assessment rates payable to local authorities for garbage disposal, road maintenance, and drainage services.
• Copies of any street line or building line certificates stating whether road widening or any other community improvement project may affect the property. A copy of the project survey plan indicates the approximate position of the street line if it affects the property. Measurement of the building line is generally from the center of the road depending on its width. The purpose of a building line is to maintain a reasonable distance between buildings for privacy and sanitation.
• Copies of any pertinent sales agreements
• Certified extracts for the past 30 years. Because land registry extracts enjoy public faith, they have become important in real estate purchases. For due diligence the buyer should know the land registry status. For verification, the extract must be stamped by the Land Registrar.
• A letter from the seller consenting to inspection of the property
• A letter from the seller undertaking to turn over possession of vacant property
• A completed application for mortgage insurance
A real estate appraisal of the market value of the property
All mortgages of land and buildings should be documented with the Registrar of Lands. The mortgage stamp duty, which is is the same for both citizens and foreigners, is payable to the Department of Inland Revenue. The mortgage stamp duty. Mortgages for any housing loan not exceeding 3,000,000 Sri Lankan Rupees, however, are exempt from the stamp duty.
The Citizenship Home Loan Eligibility Factor
Foreigners can buy property in Sri Lanka freely if willing to pay the Land Tax for foreigners at 100 percent of the property value. Alternatively, they can lease the land for 99 years to bring the tax down to 7 percent. Other transaction costs in property ownership transfers are the 3–4 percent stamp duty, the 3-percent lawyer’s fee paid by the buyer and the 3-percent realtor’s fee paid by the seller. All transactions are in cash, no checks, money orders, or other commercial paper.
Where the buyer does not have enough cash to purchase the property outright, most sellers accept deposits of at least 10–20 percent of the sale price. A lawyer, trustee, or other duly authorized agent may secure the deposit money. The foreign buyer should be in Sri Lanka for the final payoff to save additional lawyer fees for executing a power of attorney for the buyer to complete the transaction in the buyer’s absence.