The below article is by PropertyGuru.com.my
You’ve earmarked a property that you really like.
The question is, can you afford it and are you able to get a loan from the bank? These questions are especially crucial when it comes to purchasing the biggest investment and expense in your life.
A home does cost a fortune…so before you jump in, allow PropertyGuru, to guide you through some basics of loan financing and what are some of the strategies to land yourself a bank loan.
Checking Your Affordability Score
A reality check is always required when we aim for our dream home.
And it’s a click away, through the mortgage calculator, which is available at PropertyGuru.
The mortgage repayment calculator is able to project the interest rate, loan terms, starting principal payment, monthly payments and total interest payments.
By this, you would be able to know if the property is within reach, or it’s really just a dream for now!
Credit History Says It All
It is important to ensure a clean credit record, as it showcase your creditworthiness to the financial institutions when you apply for credit cards, personal loans, hire purchase loans, mortgage loans, and other loans.
In the event of having a bad credit record, you might end up getting a lower loan amount than the one you applied for or pay higher interest rate than normal. Having a bad credit report may cause you difficulty when you try to get financing for your home, car or any financial product. Therefore, it is vital to keep a clean credit report.
I would like to Purchase a Home, But I Have Limited Credit History
There are some amongst us who live frugally, and all the better if there are no car loan, credit cards or even study loans. There are also entrepreneur who believe cash vs. credit, is king.
However, if one has limited credit history (e.g.: less than a year) (and without the employee providend fund (EPF) contribution or possess a thin bureau (minimal credit repayment history in the Central Credit Reference Information System (CCRIS), it’s a tough situation for banks who rely on credit history to ensure if they are making a right judgement call to grant a loan.
The existence of a credit bureau aids financial institutions in making informed and responsible lending decisions in a timely manner. Information obtained from the credit bureau also helps financial institutions to mitigate the possibility of other issues such as fraud cases.
Improving Credit Score – The Path to Getting a Bank Loan
Having a steady job with stable income would help to improve your credit score, as it signifies that you have a lower chance of missing your monthly repayment. The bank sees you as a low-risk borrower and this helps with your credit score.
If you happen to own a business or variable streams of income, having tangible assets such as real estate, investments and savings will help to improve our credit score as well.
Banks see this as solid signs that we are financially stable, which will then be beneficial to improve our credit rating.
Fixed Vs Flexi Interest Rate
There are two types – fixed rate and flexi rate.
For a fixed rate mortgage, the interest or profit rate is fixed throughout the tenure. Hence, our monthly installments are also fixed throughout the tenure. This gives us stability and peace of mind.
Flexi mortgages have rates vary according to changes made to Bank Negara’s Overnight Policy Rate. When the rate decreases, we enjoy some savings, but we pay more when rates are increased. But, movements are usually marginal.
To find out which strategy is better for you, speak to multiple bankers or financial consultants who can advise you based on your financial situation. We’re all different so the best is to get professional advice, and not just from one single source. You would be able to compare figures, allowing you to negotiate if you need to.
Team Up With the People You Trust
If you’re caught in a situation where you really like what you see, but you can’t afford it. The trick is to partner up.
This would boost our chance of securing a mortgage, and even getting a lower interest rate.
If your income is too low for our desired home, team up with a partner who has an excellent credit history and a higher income than us.
On the other hand, if we have sufficient income but older than 40 years of age, partner a younger person to improve our chance of getting a loan, and even increasing the loan term – this will in turn lower down the amount of monthly repayment.
But remember that this is a big commitment, so only partner up with somebody that you trust.
This is Not My First Property Purchase
For the savvy property buyers who invest in property for wealth accumulation, having multiple loans would be a norm.
To navigate your way through a second, third or fourth property loan financing, it’s always good to check if you have passed with flying colours for the affordability test, also known as the Debt Service Ratio (DSR).
The DSR is derived from two main components, which are commitment, and income, which shows the amount of a person’s income is spent to service debt.
There can be major differences in the DSR calculation between banks, which can be up to 20% difference. This is because every bank has their respective calculation methods for income and commitment recognition.
Once the DSR has been determined, every bank will have their respective guidelines for max allowable DSR threshold. It is typically determined by income level, but may also be affected by net worth, qualifications and age.
Under the current BNM guidelines, the maximum property financing is capped at 90% of the property value. However, if you are a first time homebuyer, you might get 100% financing via the Skim Rumah PertamaKu.
What If I’m Not Around Anymore to Pay the Loan?
Buying a home is a huge commitment and will take the average homeowner up to 35 years to fully repay.
Hence, it should be protected even when you are no longer around.
Mortgage Reducing Term Assurance (MRTA) is a life insurance plan with the decreasing sum assured over time, and it is used just to cover your home loan owed to the bank.
This plan is usually offered by the bank you are getting the mortgage from, as it is used as protection for the bank in case of misfortunes that stop you from servicing the loan.
PropertyGuru is happy to bring you tips, trends and market insight about the local property market. Having served Malaysia, Singapore, Indonesia and Thailand for over 5 years, PropertyGuru is a leading property website in South East Asia, rendering insightful content to over 16 million people across the region.
We tailor make information campaigns to collect data, go to the streets to hear you out, interpret the research, hone in on what’s pertinent, and present you the answers in clear and easy-to digest format so that you are empowered to make confident property decisions each and every time.
We know giving you access is important to you. Hence, we are constantly investing and improving our website and our collaboration with media, and offering bylines such as the above to increase awareness about property amongst the nation.