Understanding home loan eligibility

The rejection of home loans was reported at close to 60% last year as banks sought to limit their exposure to the residential sector

by MARK RAO/ pic by TMR FILE

THE federal and state governments’ affordable housing schemes are often well received, but many prospective applicants often fail to secure financing from banks due to a number of reasons.

More often than not, the person’s financial position is the main reason banks reject a mortgage application.

Last year, Malaysia’s household debt to GDP was high at 83% or RM1.18 trillion, with housing loans accounting for 53.2% or RM628 billion of the total.

The rejection of home loans was reported at close to 60% that same year as banks sought to limit their exposure to the residential sector.

Note that loans for home purchases comprised 24% or RM6.51 billion of the total RM27.12 billion non-performing and impaired loans recognised by Malaysia’s banking sector as of June this year.

It is, however, misleading to say that it is only the stringent assessment process adopted by banks that prevent prospective homebuyers from securing a mortgage.

According to an article published by Bank Negara Malaysia (BNM) in its 2017 annual report, housing loan applications were typically rejected if a borrower was highly leveraged with weak credit history.

Insufficient documentation to support their ability to meet loan repayment obligations was also cited as a reason.

The process of applying for a home loan needs to go beyond the rule-of-thumb of ensuring your monthly loan and current commitments (such as car and personal loans) do not exceed one-third of your monthly salary.

While a useful starting point, there are a host of other factors that go into determining home loan eligibility.

According to BNM’s consumer guide, a borrower should compare the effective lending rates of different banks before taking out a new loan

Assessing Eligibility

First-time homebuyers typically qualify for a loan-to-value ratio, a risk assessment used by a lender before approving a mortgage of up to 95%, whereas the maximum ratio for borrowers with three or more outstanding housing loans is set at 70%.

A bank can also finance up to 90% of the property price with homebuyers required to pay 10% in cash for the down payment, while the maximum home loan tenure is currently fixed at 35 years or until you turn 70 years of age, whichever comes first.

So, what exactly determines a prospective borrower’s home loan eligibility?

The criteria used by a bank in determining eligibility can be broken down into income, repayment behaviour, individual risk profile and personal debt servicing ratio.

While income refers to a borrower’s monthly earnings, repayment behaviour and individual risk refers to credit history or record of debt repayments, capacity to repay debt, capital, conditions of the loan itself and associated collateral.

The debt servicing ratio broadly refers to the amount a borrower’s personal income will go towards paying debt installments. This is calculated by dividing total commitments with net income and multiplying that amount with 100%.

How this ratio is calculated may differ from bank to bank, while the maximum debt servicing ratio allowed by a respective financial institution also varies. It is here that getting to know your bank is integral.

The SC has released a new framework for property crowdfunding in May this year

Knowing Your Bank

According to BNM’s consumer guide, a borrower should compare the effective lending rates — namely, the indicative annual rate for a standard 30-year home loan with a RM350,000 financing amount and no lock-in period — of different banks before taking out a new loan.

Borrowers are also advised to request for a product disclosure sheet which will provide the effective lending rate and total repayment amount for the respective loan or financing being sought.

Thirdly, borrowers should ask a financial institution to explain the factors that may lead to a change in the base rate as monthly repayments will increase or decrease when the base rate changes. Note that home loans also come in fixed or conventional rates.

The former guarantees fixed installments over the financing tenure and provides stability and easier planning of monthly financial commitments, while the latter has variable interest and profit rates for borrowers looking to capitalise on features such as overdraft facilities.

As of June this year, Malayan Banking Bhd (Maybank) and Public Bank Bhd had the lowest indicative effective lending rates at 4.35% respectively, followed by Alliance Bank Malaysia Bhd at 4.36%.

For Islamic financial institutions, Maybank Islamic Bhd, Public Islamic Bank Bhd and Alliance Islamic Bank Bhd had the lowest effective lending rates at 4.35%, 4.35% and 4.36% respectively.

Ultimately, the best way to determine your eligibility is by using the home loan eligibility calculators provided by most major Malaysian banks on their websites.

Prospective borrowers can also make use of third-party platforms such as iProperty.com.my’s LoanCare which compares a borrower’s eligibility from up to 17 banks.

The Securities Commission Malaysia (SC) has released a new framework for property crowdfunding in May this year — a platform aimed at providing an alternative financing avenue for first-time homebuyers.

The prospective homebuyer on the platform needs to be at least 21 years old and the financing limit for the property to be purchased — valued at no more than RM500,000 at the primary offering — is up to 90%.

The crowdfunding platform, the first of its kind in the world, does risk saturating the market with too much credit and thus, exacerbating household debt if no proper safeguards are in place.

According to BNM’s latest Financial Stability and Payment Systems Report, some Malaysian households are showing signs of difficulty in servicing their debt.

This was mainly evident among lower income borrowers with personal financing and borrowers with larger housing loans (above RM500,000), the central bank noted.

It is thus imperative that one finds the right balance of investing for the future and managing his or her finances.

Knowing your credit risks and eligibility is a better place than any to start.