Loan compression or multiple loan submissions, is a common property investing strategy preached by almost all property investment gurus.
The intended outcome?
You end up owning (albeit with massive leverage) multiple real estate properties, on paper (since they are still charged to the bank).
You accomplish this at one go, often exceeding your financial affordability to service the loan.
If this does not make sense to you yet, then stay on and read this article to the end.
And just so you know, you are reading the most ‘no-holds barred’, neutral guide on the planet on loan compression (multiple loan submissions) in Malaysia.
The best part?
We are going to reveal the excruciatingly detailed loan compression (multiple loan submissions) process so you don’t need to spend thousands or even tens of thousands of your money just to learn this from the property gurus’ seminars (which comes with up-sells after up-sells!)
But understand this – we personally DO NOT condone or encourage it. (read until the end below and you’ll understand why). In fact, we strongly suggest the regulator impose more stringent measures to curb this.
That being said, I don’t want to judge you, if this is your cup of tea. But, please, protect yourself. Read this guide and watch the video below until the end.
After all, it’s human nature right? We don’t want to be the last one to know about anything and the one being left out, yes? And the fact is, this is happening everyday and everywhere, ‘under the table’.
Watch this lesson below (click PLAY)
What exactly is Loan Compression (Multiple Submissions) & How it Works
With this guide, you don't need to wonder anymore how seemingly common people manage buy a number of real estate properties in rapid succession or even in one shot...
...in spite of decreasing margin of financing* in Malaysia for mortgage loans
*Note: since 2011, the central bank had imposed a ruling the 70% MoF (Margin of Financing) or LTV (Loan to Value) for 3rd property purchase onwards, as a measure to control ballooning household debts and hike in real estate property prices
Now, imagine you've identified the real estate property you wish to purchase, and then you approach 5 different banks to apply for mortgage loan.
The fact is - that's the usual practice even if you genuinely want to buy 1 real estate property. You shop around for the best deal or offer from banks.
This practice also acts as a safety net in case any one bank rejects your loan application for whatever reasons.
By having more than one approved mortgage loan offer on hand, you still have backup plans in case your #1 choice gets rejected.
You, just like most everyone else, will go for the bank which gives you the best (lowest) interest rate mortgage loan offer.
There's nothing wrong with that, in fact, that's what a prudent property purchaser or investor will do -
...you compare the mortgage loan letter of offers, with interest rate percentage being the major factor in your decision.
The First Hurdle to Execute Loan Compression: Debt Service Ratio
This is your first test- your Debt Service Ratio (DSR) - which is your ...
(total existing + upcoming monthly debt repayment)
your net total income*
...must fall within the bank's lending guideline.
*total net income can encompass things like existing rental income, ASB dividends, interests from fixed deposits, apart from your main income from employment or business.
DSR approval criteria varies between one bank to another, and it could change from time to time, but here's a rough guide.
As you notice, a Low Debt Service Ratio is favourable.
But if you have low income, high financial commitments or both, then you need to sort this out first before even trying to do Loan Compression.
Else it won't work. Don't bother applying any mortgage loans from banks, let alone doing loan compression.
Now, more often than not, property investment gurus will teach you to 'cook up' fake salary payment slip (for the unemployed)
Don't be silly if you think you can just 'make it up' instantly; you still need time to 'accumulate' 3 to 6 months salary slip by persuading a friend or family member to ‘hire’ you into their company.
And things need to be done properly - like there must be proof of EPF and SOCSO contribution.
And if you are not really doing any 'real work', even though your friend or family relative are willing to help you, you probably need to provide them a lump sum money to do this for you.
And sorry, while you can pay by credit card to join the property investment workshops or classes, this is something you need to cough up hard cold cash upfront.
Anyway, this is the stage when the 'loophole' opens up
Instead of signing ONE mortgage loan letter of offer and ignoring/rejecting all others, you sign all approved mortgage loan offer letters to accept EVERYTHING.
Not a typo - EVERYTHING.
Using a practical example, let's say - you apply for 8 banks, but only 5 banks approve your mortgage loans. Either that, or assume only 5 banks are able to give you the margin of financing or the interest rate you want. So now, you proceed to 'book' and 'purchase' 5 units instead of 1 unit (versus what normal people do).
Your main accomplice will be the property salesperson who knows what you are doing and willing to help (why not, right?).
Because only then will you be able to amend or 'restructure' the booking forms according to the number of mortgage loans approved by banks.
Why you want to do Loan Compression
When you think you want to achieve so-called financial freedom as soon as possible, and you go all out to purchase, say, 5 or even 10 (!!) real estate properties at the same time knowing that your income is only eligible for 1 unit.
Traditional Way to buy, say, 4 real estate properties - an Illustration of the Slow & Steady way
|Age 40 start @ Year 1||Year 1||Year 3||Year 6||Year 8|
|Net Salary Income||10000||12000||15000||18000|
|Car Loan Monthly Repayment||1200||1200||0||0|
|Existing Debt Service Ratio||0.12||0.5161||0.5543||0.6273|
|Amount of Initial Mortgage Loan you can take||1326455|
|Amount of Max Additional Mortgage Loan you can take||1122994||1387441||1474428|
|Amount of Max Additional Mortgage Loan Repayment||6800||5950||7950||9000|
|New (Max) Debt Service Ratio||0.8||0.9||0.9||0.9|
|Max Mortgage Loan Tenure||30||28||25||23|
This is usually done on newly constructed real estate property in the market where the property developer offers mouth-watering cash rebates for your purchase.
For example, you get RM 50,000 cash rebate for a RM 500,000 real estate property.
Monthly mortgage repayment circa RM 2,500 with a 30 years loan, 4.6 percent interest rate. Around RM 30,000 mortgage loan repayment annually, yes?
A RM 50,000 cash rebate can theoretically sustain you 1.5 years even if your purchased real estate property is untenanted, before you start bleeding cash flow.
Or put it another way - you have around 1.5 years to let go or 'flip' your real estate property for quick profit, but don't forget about real property gain tax (RPGT) eating into your profit.
On top of that… we have NOT factored in other required expenses such as renovation costs, which can cost a few tens of thousands to get your real estate property ready to be tenanted.
How about legal fees?
Now, even if you purchase from property developer who promises “free legal fees”, it often mean that the developer will only pay for the legal fees on the S&P (sale and purchase) agreement and legal/stamp duty (MoC* fees)
It may not cover loan (facility) agreement legal fees, and most likely won't cover disbursements such as stamp duties (MoT fees**), searches fees, registration fees, printing charges, purchase of documents costs, mortgage insurance etc
All these added up together could also mean a substantial amount of incidental property purchase expenses, amplified by the number of real estate property you buy.
*MoC is the memorandum of charge ie a document executed to effect the charge of your property in favour of your financier.
**MoT is the memorandum of transfer ie an instrument to effect the transfer of the title of the property to you as the owner.
The second hurdle to execute Loan Compression: Repayment history in your CCRIS record
Your CCRIS records has to be sparkling clean to begin with.
Even though your Debt Service ratio passes the bank's guideline, a botched repayment history caused by late payments of your existing loans (like credit card balance, personal loans, PTPTN loan and even existing car or mortgage loans) can spoil your plan to execute Loan Compression.
Therefore, having an uneventful CCRIS record is usually the first (and somewhat tricky) step to be 'qualified' to purchase a real estate property.
Now, property investment ‘gurus’ will teach you to borrow money from friends and relatives to settle your outstanding loans.
But understand this - your CCRIS record or credit worthiness history does NOT go from black to white overnight just because you settle your outstanding loans to improve your Debt Service Ratio.
It goes further than that which is why I explain it in detail over here - CCRIS Check Online: How to Solve your Problems
Suddenly you realize there's so much extra work, not to mention, money involved! Are you ready for this?
Why you DO NOT want to do Loan Compression
If the lender (banks or financial institutions) detects you've accepted more than one mortgage loans, the bank credit/compliance/risk department will once again investigate by drawing a fresh, recent copy of your CCRIS records.
At any point of time, this is the likely scenario that could happen to you, before banks start releasing/disburse the loan to the property developer (which you bought your real estate property from),
If you only have declared income of say, 8,000 a month and then bank sees there are 5 mortgage loans being recently approved AND accepted for a total of RM 3 mil, what do you think bank action will be?
- Recall your mortgage loan acceptance offer (and might put your name into Special Attention Record). Now you are really 'Special', and this 'tag' will stay with you - which means, whatever credit facility you apply from any banks in the future might also take this into account. Whether this cause banks judge your negatively is very subjective but it is better NOT to have this tag than to have it. You may or may not be able to get back your booking deposits/down-payment paid - either from the property developer or the seller (likely you'll be at their mercy)
- Request you to furnish a show-cause letter or something of that sort (could be a verbal query, interview etc) to explain yourself. This can only end one way - badly. Your Margin of Financing or Loan to Value (LTV) will be parred down to 70%. This is because banks deem the real estate property you are purchasing using the approved mortgage loan is your third (or above) real estate property. After all, banks need to comply with central bank regulations. No choice, now you need to dig into your coffers to cough up the 20% difference (90% - 70%)
This is the trap that most people fall into - follow blindly when seeing other people do Loan Compression without understand the downside risks.
About the Author
CF Lieu is an independent financial adviser (IFA) with CFP qualification and licensed by the Securities Commission of Malaysia to conduct regulated financial planning activities and charge a professional fee for it.
His credibility in investing comes from the fact that in addition to managing multi-millions equity investment portfolio for clients as an independent financial adviser, he is also sought after by corporate financial organizations (like fund houses, financial associations and reputable banks) for his investment expertise in REITs, to conduct workshops & seminars for their internal staff, whom consists of:
- C-suite executives
- Investment Analysts
- Financial Advisers