Home loan cannot be separated from property purchase – be it for own stay or investment. “Affordable housing” is a recent buzzword much thrown about lately due to the increasing urgency of the matter, but the term itself may well imply different things to different groups of people.
To policy makers, financial institutions and even property developers alike, “affordable housing” simply means that you can “afford” to buy a property and can qualify for the home loan based on your projected income level.
However, such definitions fail to take into account that, for homebuyers, “affordable housing” does not just mean qualifying for home loans in the initial stage, but also the ability to maintain a minimum standard of living after apportioning a significant chunk of their household income for the monthly repayment of a 30-year housing loan.
The optimal target for homebuyers is to purchase a property priced at a multiple of three times their annual household income or less.
With a national median annual household income of RM55,020, an affordability ratio of three means that half of the Malaysian population can only afford to buy a house that is under RM165,000. But houses affordably priced within this range, are increasingly hard to come by.
Nonetheless, this guide will hopefully get you informed and give you an edge in getting your home/property loan approved. That is the first step because we manage the best we could on what we can control.
Download this article below as a checklist in PDF and learn the #1 thing you should NOT DO before signing your home loan offer letter.
Number 1: Review and restructure your existing loans
With everything thing else being the same, a house buyer with lesser or no consumer loans (such as outstanding credit card or personal loan balance) is viewed more favorably than a buyer with consumer loans.
Although having many credit cards is not a deal breaker per se, if it is coupled with a tags other than ‘0’ on your CCRIS report (How to read a CCRIS report) or comes with substantial outstanding amount, then it is a red flag for banks in approving your home loan application.
Banks are so delighted to give out personal loans or to have you carry higher outstanding credit card balance (as a result of you only paying the minimum amount every month) because they can earn like, 18% interest per annum. However, the tables turned when you apply home loan with them – think you are a VIP customer if you have multiple consumer loans with the same bank? Think again. Consumer loans in your CCRIS record don’t impress banks.
Aside from that, too many property loans (on properties under construction under the ‘sell then build’ scheme in Malaysia, generally) acquired within a relatively short duration (ie, within 2 years), is also a red flag for banks.
Bank will deem you are a serial investor through CCRIS record. Doesn’t matter if it is a joint name loan, one is considered high risk applicant by bank. Say if the 4 properties you bought are not already generating rental income which can offset your mortgage installments, banks may see this a big whammy when all properties reached Vacant Possession (VP) at the same time. Your commitment will be high once you start servicing all these loan installments. Investors clubs are rampant nowadays, and banks are neither stupid nor blind.
If your monthly income warrants for it, refinance your current mortgage which has passed its lockdown period, and pay off the consumer debts. This looks better for banks when they check your CCRIS record for applying new property loans – you might be paying the almost the same total monthly installments but having collaterized loans like mortgage will be better than carrying substantial consumer debts. Definitely a better ‘kill-2-birds-with-one-stone’ move for you because you save paying high interests on the consumer loans and your CCRIS record looks better for bank to approve your new property loans. Do all these before you even you submit application for your new property loan.
However, take note of Number 4 below.
Number 2: Know how to Compute Debt Servicing Ratio (DSR) before home loan application
Inadequate repayment capacity is another primary cause of property loan rejection. Firstly, it is computed based on your net income nowadays as opposed to gross income back then. Evidently, net income is after deducting 11% EPF contribution, Monthly Tax Deduction (MTD aka PCB), SOCSO if applicable and government loan repayment if any.
Many people also made the mistake of assuming up to 85% DSR. Wrong. It depends on your net income. Example, if your net income is RM 10k, then this is likely the case because realistically, you still have RM 1,500 left to cover your other monthly expenses.
If you net income is RM 4k, sensibly speaking, you are left with RM 600 to cover your monthly expenses, which is not realistic. Therefore, your likely DSR is only at about (2.5k/4k) = 62.5% after accounting for RM 1,500 of monthly personal expenses.
Number 3: Recognize and consolidate all your income record for 6 months minimum, preferably 2 years before home loan submission
Professions which are commission-based such as insurance/unit trust/MLM/real estate agents or even self-employed individuals will encounter more difficulty in obtaining home loans, compared to a full time employee, assuming the income level is similar.
Banks generally don’t give you the benefit of doubt for commissioned based income, which tends to fluctuate, especially those with lesser than 2 years track record.
Example, you could be making average RM 20k per month in the first year, but bank will question whether this is sustainable in the 2nd and 3rd year. Therefore, banks don’t take income from this group of people at face value. They will instead discount it – say 70-80%, which may vary across banks. Back in the days, they only see for the past 6 months, but now, they want to see a longer track record. The key word here is CONSISTENCY AND CERTAINTY. Even professionals like lawyers or doctors under self-employment are subjected to the same way of evaluation by banks who want to see the business can do well beyond 2 or better, 3 years.
Having said that, properly consolidate all income/revenue into 1 bank account also helps. And these must be properly documented. If you receive rental income but don’t have proof for it via bank statements or receipts issued, chances are they will not be accounted for when calculating your DSR, to your disadvantage.
Number 4: Know precisely how to compute your new monthly mortgage repayments after refinancing.
This, you need to know Bank Negara rule introduced in 2013, to cap the refinanced amount repayment duration to 10 years for personal use. Purpose is none other than to curb property speculation and manage excessive household debt.
This Bank Negara ruling no doubt cast a shadow of confusion. Some wonder if the 10 y cap requires one to fully pay up refinanced (top-up) portion of the home loan, or if they 10 y tenure is merely a benchmark to measure one’s ability to service the debt, and that if one were to pass the ‘test’, the bank will grant a home loan tenure of up to 35 y or age 70, whichever comes earlier.
The reality is, implementation differs among banks. Some strictly follows Bank Negara ruling, while others allow a longer repayment tenure (> 10 y) if the DSR of the borrower meets the set ruling if computed based on 10 y tenure.
Banks which strictly follow the ruling will make your installment very high; if it exceeds your DSR (see Number 1), your loan application will be rejected. Don’t fall into this trap!
Number 5: For those in their first job, take a credit card – use it and repay on time (and in full if possible) every month.
Not a single loan or credit facility under your name is also a BAD THING, contrary to what most people believe.
First timers in the workforce with zilch CCRIS record are particularly vulnerable to loan rejection due to lack of credit history.
The riskiness of a home loan is not determined purely by the applicant’s income level and number of outstanding loans. It also involves the health of the loans in the applicant’s Credit Bureau record and his repayment behaviour.
This means that a person who earns RM5,000 a month may not necessarily be a higher risk compared with a person who earns RM20,000 a month.
Say if you are working in a local company for less than a year – and even if you can afford to buy a house based on Number 2 above, your home loan will risk being rejected if you don’t have any credit facility to your name (most common being credit card and car loan).
Bank will give you the benefit of doubt though if you work for a reputable multi-national company or conglomerate. Don’t take it as surefire guarantee though because even big corporations are undergoing retrenchments in this age. Think of oil and gas companies in 2015.
Number 6: Prepare all your bullets….I mean, complete documents for loan application
Property loans are never pre-approved, so furnishing banks the complete documentation is crucial.
Consolidate all your income channels, if you have more than 1 aside from your salary and put that into easy-to-digest manner for the bank’s approver, usually only 1 single person in bank HQ.
This 1 person approver ensures fairness for all applications processed. That also means he/she looks at hundreds, if not thousands of applications every day. Make him/her job easy by making all relevant documents in an easy-to-understand form. Otherwise, the approver may miss something you are trying to convey, and end up with rejection. Do the right things right so you save time from the hassle of appeal.
It’s not about how much you *think you earn, it is about proving what you earn. Everything must be in black and white.
Back in the days, salary slips are sufficient. Not anymore.
You need to provide EPF statements which tally with your salary slips as well.
Some banks go even further to call up your company HR to verify your employment.
If your HR don’t entertain such requests, you need to provide your letter of employment.
Also, not to forget your IC photocopy.
Number 7: Don’t submit Fraudulent Information (DUH!)
Self-explanatory, yet some who are on buying spree took great length to fool banks. Tampering salary slips ranks the top, that’s why banks now require EPF statements as backing proof too. However, once you are caught, then one will be blacklisted indefinitely.
Blacklisted applicants don’t know about their predicament as banks don’t have the obligation to explain to customers the reasons of home loan rejection. There is no way to ‘repair’ this so don’t even try. No bank officer you interface is allowed to divulge the reason for rejection.