According to a report, one out of two housing loans are rejected in Malaysia, which is no doubt a shocking statistic. It implies that half the loan applicants in Malaysia are denied the chance of owning property and may have to continue renting for an extended period of time.
Many have pointed their fingers towards the banks for not approving many of these loans. However, these strict loan approval guidelines are set in place to protect both the banks and you, the future homeowner.
While it may be disheartening to be denied a home loan, it also means that you are not taking on more debt than you are supposed to. This helps you avoid more systemic problems with your personal finance down the road.
But if you are confident that you are ready to take on the responsibility of being a homeowner, here are some factors that play an essential role in determining your loan eligibility.
4 Factors That Affect Housing Loan Eligibility
1. Loan-to-value (LTV) ratio
The LTV ratio is a risk assessment tool used to determine how much the bank is willing to finance on the homebuyer’s behalf. This ratio is based on the property value.
Since 2010, Bank Negara Malaysia has regulated the LTV ratio for residential properties. For homebuyers looking to purchase their first or second property, you can typically expect a maximum LTV ratio of 90% for your mortgage.
For property worth RM500,000, you could expect to borrow a maximum amount of RM450,000 or 90% of the property’s total value.
For the third property onwards, you can only borrow a maximum of 70% of the value of the property to minimise the risk of overleveraging. The only way for you to re-unlock the 90% LTV ratio again is for you to pay off the remaining debt from your previous loan fully.
However, homebuyers can gain a slight advantage over this ruling policy by not purchasing the property under a joint name account.
First-time homebuyers typically purchase a property under a joint account with their spouses. While there are several advantages of doing so, by opting for a joint loan account, you would be taking up two “quotas” instead of one.
If both spouses decide to purchase properties separately, they could potentially finance up to four properties under the 90% LTV ratio, provided that both spouses have decent income capabilities.
2. Debt-to-service ratio (DSR)
The DSR is simply a measurement of your available cash flow. This allows lenders to gauge how likely it is for you to pay off current debt obligations.
For example, both Mr Tan and Mr Lim earn a monthly gross income of RM6,000, and both of them would like to buy a new home. Mr Tan does not have any debt obligations, but Mr Lim is servicing a hire purchase loan of RM500 per month for a car that he recently bought.
From the bank’s perspective, Mr Tan is a much more attractive loan applicant compared to Mr Lim because he has a better ability to service his loan due to his lower debt obligation despite having the same exact income.
In Mr Lim’s case, provided that he has no additional debt obligation, his DSR is calculated as follows:
RM500 debt / RM6000 income x 100% = 8.33% DSR
That said, 8.33% is an extremely low DSR and Mr Lim should not have any issues getting his loan application accepted. DSRs are not highly regulated, and all banks have internally determined their respective DSR. The more you fall within the range, the higher the chance that you will be able to get approved for the loan.
In fact, the DSR is also not unique to property finance, as the terminology is also used in corporate and government finance to gauge how likely it is that these entities can finance their debt.
3. Credit score
Without a doubt, your creditworthiness is an important, if not the most important element when it comes to determining your loan eligibility.
If you have been diligently paying off your water and electricity bills, diligent in paying off your car loan, it shows that you are responsible with your personal finance. This will, in turn, build trust amongst banks that you have the capacity to take on a significant amount of debt.
There are multiple ways to obtain your credit score, but by far the most direct way of doing so is through a local credit reporting agency.
CTOS is, by far, the most popular private agency in Malaysia right now, but you can also obtain your credit score from the Central Credit Reference Information (CCRIS) managed by the Credit Bureau of Bank Negara Malaysia.
Obtaining a report is not that expensive – under RM30. However, credit agencies usually offer free personal reports during sign-ups or free report promotions within a limited time. It pays to have a copy of your personal credit report to determine your creditworthiness. It’s useful to find out how you can improve your credit score based on the debts you have on hand.
For fresh graduates looking to buy a property, one easy way to build your credit score would be to apply for a credit card as soon as possible, use it, and pay it all in full diligently. Doing so as early as possible will give you an edge compared to your peers if you plan on investing in real estate at an early age.
4. Your bank’s risk profile
While many of our readers may aspire to become one of the best investors in the world, none can come close to beating banks in their own game.
Breaking down investments into its fundamentals, it is ultimately the balance between risks and profitability. And banks have built their entire business models around these two factors, employing world-class mathematicians and sophisticated algorithms to determine the amount of risk they are willing to accept in exchange for profit.
It pays to view banks with this perspective. At this point, property owners are the investment products and the banks are the investors themselves. And just like any prominent investor, banks come with a variety of risk profiles as well.
You can gauge the personality of banks easily based on the mortgage rates that they employ. Banks who offer mortgage terms that provide lower interest rates are generally much more selective in offering mortgages.
Conversely, you are more likely to have an easier time obtaining loans from banks that offer higher interest rates or banks that heavily push for upsells such as mortgage insurances to make up the profits.
While there are other prominent factors at play, it is hard to deny that the bank’s brand, “personality,” and risk profile all play a role in determining whether you will obtain your loan.
By understanding the factors listed above, you should have a clear understanding of whether you are eligible for certain loans.
All of this information further highlights the importance of managing your personal finances well. As long as you are responsible with your money as well as cash flow, you can take advantage of investment opportunities. In turn, you can leverage these real estate investments to build even more wealth in the future.
Investing in real estate should be accessible to anyone and everyone.
Don’t be intimidated by this seemingly complicated process. Ohmyhome can help you with your property investment journey. We provide top-tier services by trusted real estate professionals from start to finish.
Call +60 16-299 1366 today!