The Traditional Mortgage
Most countries will often refer to a Mortgage as the means to purchase real estate by borrowing money through a bank or financial institution and registering the debt at the local government office using title deeds or house registration documents. In essence, there is an exchange in the form of real estate paperwork for some form of cash without a change of ownership. A Mortgage can be used for owners of real estate that require some help with their cash flow i.e. Could apply for an advance of cash using the property as collateral…
Under a typical Mortgage term, the title deed or property document will remain in the owner’s name and a Mortgage is registered over the title with the original document than handed over to the lender as security. The key thing to note for a Mortgage is that the title deed remains in the owner’s name.
Once a Mortgage is registered over the title, it will then be noted that upon any future attempt of sale or any type of transfer transaction, the debt would need to be paid before, the original title deed can be released of its charge.
In comparison to the next option Kai Faaq, advantages are generally considered more in favour of the owner in that the title deed remains in their name. A lender has security in the form of an official registration/charge and by holding onto the original document, would be hard for the owner to take back the collateral without first, paying off the debt owed to the lender. In essence, the lender would need to file legal action against the borrower upon the debt default, which would lead to a foreclosure of the property and then, receive any proceeds from the foreclosed asset through an auction process only. It is prohibited by law to have any agreement in place whereby the security can be transferred to the lender in case of default.
The Kai Faaq (Traditional way of Thai lending)
Specific to Thailand, an alternative to a Mortgage is available and this is most commonly called Kai Faaq or any number of slight deviations such as Kai Faak or Sale and Right of Redemption. This method of lending has been the most popular and the more traditional way of borrowing for Thai’s whilst it has been in place since longer than the Thai revolution.
The way in which this differs most from a traditional Mortgage, is that an owner will pay to transfer all ownership documents from themselves, to the lender and make the lender the official owner of the collateral. The borrower may still in the meantime utilise the collateral. By doing so, the lender can hold the collateral without going through and complicated legal process simply as soon as the debt goes into default or, the term is over and the debt has not been repaid. In essence, you may ask why after purchasing a prime beach front plot of land for let’s say THB 500,000,000 would you than wish to transfer the ownership onto someone else…… The answer is simple, quick cash.
Let’s take for example a scenario of a businessperson who has been holding onto this THB 500,000,000 plot of prime beach front land for several years until the time was right to develop a luxury resort or condo. That time is now and they require cash to begin construction and aims to finish within the next 12 – 18 months. If the businessperson was to go a bank for finance at let’s say THB 200,000,000, the bank would may probably ask for projections, forecasts etc. etc. and go into depth on the ability to repay the loan since, they would perhaps usually only be interested only in the loan and not, in the land. This could sometimes take several months and many obstacles to overcome before any approval could be granted.
With Kai Faaq, by transferring the collateral ownership from day 1 to the lender, in a way, the lender is purchasing the land plot at a reduced price with the existing owner paying for all the transfer fees. In exchange the existing owner than gets a lump sum of cash immediately to dispose of as they wish and even to the point that perhaps, no monthly installments for the next 12 – 18 months as all fees could be deducted up front. Now here comes the key part. If for example the contract had been drawn up for 18 months, there is a “right to buy back” the collateral which had usually also been set up on day 1. The right to buy back is for the same amount as what was borrowed at the start, minus any fees and interest. Providing the lender gets the money back on the agreed date specified, ownership is then transferred back to the original owner.
You may now ask, why you would do this kind of finance when a Mortgage could be available….. In response, there is no particular reason however, the borrower may find far more simple and effective to consider the Kai Faaq as little documentation is required to approve the loan and is predominantly asset based as opposed to credit rating assessed. I.e. if the lender has a vested common interest in the land, they may be hoping the debt is not repaid since in effect, they purchased it at half price and may wish to develop it themselves or sell on for a profit. The borrower on the other hand may be more than happy to borrow this way since is less fuss/hassle to approve the loan and there is no concern or bother for installments over the next 18 months. It is simply a way to generate cash, invest in their business of choice and probably make more money than a lenders interest (depending on the lender) over the term. I.e. Particularly if the developer is selling units of a Condominium!
In essence, defaulting on a Kai Faaq would not impact your credit bureau rating since; it is not treated as a financial debt and not reported to the National Credit Bureau (NCB) of Thailand.
A caution to exercise from the borrower’s perspective is simply to know who they are dealing with and what the full terms are of the loan. It has been reported some owners of collateral have borrowed under Kai Faaq terms paying often more than 30% per annum when actually; the maximum permissible by law is just 15%! This can often turn into a never ending interest top up with owners forced to relinquish their assets.
Other things to consider are the one time taxes payable at the land department to transfer the property. A lawyer would usually be able to provide you with near exact figures however below are typical taxes which could be applied when transferring property ownership.
3.3% Special Business Tax (SBT) – Applied if sold within 5 years for individuals (not for corporate)
Calculated by the registered sale and purchase price declared at the land department)
1.0% Withholding Tax
Calculated by the registered sale price or government assessed value, whichever is the higher
2.0% Government Transfer Fee
Calculated by the government assessed value
Finally, at MBK Guarantee Ltd. I am pleased to confirm we offer both of the above lending options for our clientele.
Typically a Condominium would be registered under a Mortgage and a large Land Bank would often be registered as a Kai Faaq.
Prime Land Bank locations could be seen as Beach Front with direct access to local facilities, roads alongside and low lying with no hillside/cliff. A good opportunity for both the borrower and the lender to obtain a little cash! Our rates are typically around 9.25% for Condo and 12.75% for Land.
Useful key terms in this article
Lender – The company giving the money
Borrower – The person/company receiving the money
Owner – The person/ company who has their name on the property documents
Title Deed – The official government recognised document to show true ownership of collateral
Mortgage – Term for registering a debt without change of ownership
Kai Faaq – Term for registering a debt with a change of ownership