Given that applying for a housing loan is not as easy as a ‘walk in the park’, here's a simple guide to arm its readers with much information as possible on the four key factors that banks take into account before they approve your mortgage application.
1) Property Value
Financial institutions will look into the fair market value of the home you intend to buy as it gives them an idea on how much loan you need.
This is particularly vital for ‘second-hand homes’ as the asking price could be different from the prevailing value.
But it is less essential for new and off-plan houses bought directly from developers as these companies are required to disclose to the lender the price of the property and any discounts given to the buyer.
Basically, the valuation determines the maximum value of your mortgage.
For example, if you will buy an existing apartment for RM500,000 but its market value is merely RM450,000, the upper limit of your loan will depend on the latter.
This has a huge impact as the buyer would shoulder the excess amount out from his own pocket.
Sometimes the market value of a home differs from its asking price, while different financial institutions could have varying valuations for the same property, so it’s advisable to inquire from more than one bank to get the loan quantum you need.
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2) Your Income
Lenders can see if you have the capability to pay off your mortgage by looking at your monthly household income.
However, it must be supported by relevant documents like pay slips, EPF statements, bank passbook and audited accounts.
Don’t even think about acquiring forged documents, as it could land you in jail. Additionally, the paper trail should run for 3 months or more to prove that your income source is stable.
3) Your Existing Liabilities
Banks need to compute your existing liabilities or total debt obligations per month to ascertain that you will still have sufficient cash to repay your mortgage after deducting your expenses.
These include car loans, outstanding credit card balances and other mortgages.
Essentially, your total monthly debt obligations are divided by your income then multiplied by 100 to get the Debt Servicing Ratio (DSR), which represents how much of your income goes to debt repayment. As a general rule, your DSR should not surpass 70% of your net income.
Also, don’t attempt to hide your other existing debts on the belief that it will increase your chance of getting your loan approved.
This is a bad idea as financial institutions can see all of your liabilities from other lenders through Bank Negara Malaysia’s Central Credit Reference Information System (CCRIS).
4) Your Risk Profile
Lenders take risks when they grant mortgages as there is a possibility that the borrower could default on their loan. To minimise the risks, banks examine how well you have repaid your loans in the past.
For example, through the CCRIS, they can see if you have been late on your repayments or failed to repay some monthly instalments.
This database can also reveal if a lender has initiated a legal action against you, which is another red flag for your mortgage application.
For those believing that having no existing debt translates to a good credit history, sorry to burst your bubble.
Financial institutions are cautious of lending huge amounts of cash if they cannot asses your repayment trend.
So if you don’t have any liabilities at present, take out at least one, like a credit card account to which you can make timely payments before applying for a mortgage.
Another tip for getting a good credit score is to promptly pay your current loans. If you are struggling to repay them on time as the due date is ahead of your payday, request the bank to delay the billing cycle.
But if you have been delinquent in any of your liabilities, it’s advisable to wait 12 months after your last known late payment record before submitting your mortgage application because CCRIS only keeps up to 12 months’ worth of records per individual.
Specifically, the CCRIS is updated every 15th day of each month, meaning information for January 2015 will be available on 15 February.
Therefore, if you have made timely payments for the entirety of January and the previous 11 months, you can apply for a mortgage on February 16.
5) Your Age and the Loan’s Tenure
Lastly, the bank needs to determine the loan’s tenure or how long the borrower will be repaying it.
The term of property loans is 35 years or until the mortgagor reaches a certain age, whichever is earlier.
It’s usually until 65 or 70, but there are some Malaysian financial institutions that allow a higher maximum age.
This means those who applied for a mortgage at 30 to 35, have no problem in getting a 35-year loan but those who are older can only get mortgages with a shorter term.
The advantage of having a long repayment period is that your monthly instalment will be smaller, but the total amount you will be paying will be bigger as compared to loans with shorter tenures.
For example, Mr A took out a 10-year housing loan valued at RM200,000 with an interest rate of 4.25%, while Mr B got a mortgage with the same amount and rate but is payable in 20 years.
Mr A’s monthly instalment would amount to RM2,049 and the total amount he would end paying is RM245,850, while Mr B’s monthly instalment is only RM1,238 but the gross amount he would be spending is a lot higher at RM297,233.