Housing loans - what you must know!

Over the past year or so, a few quarters – especially property developers and real estate agents – said many of their customers were finding it difficult to get financing to buy properties. Some complained that the banks were too strict.

Bank Negara Malaysia statistics published in the recently-released National Property Market Report 2015 showed there was an annual drop of 14.6% in residential loan approvals last year, while applications fell by 10% (see chart 1).

According to RHB Banking Group head of group retail banking U Chen Hock, the bank has always practised a consistent risk-scoring approach in underwriting new housing loans and it is not seeing any significant decrease in its loan approvals.

Nonetheless, he notes that RHB’s approval rate remains high at above 75%, although volumes have dropped in tandem with the contraction of the residential property sector.

“We believe last year was a period of consolidation when both buyers and sellers adjusted their expectations in terms of affordability, resulting in lower transaction volume. However, we are optimistic of an improved residential property sector and approval rate in the near future,” U tells TheEdgeProperty.com.

He adds that residential mortgage is a very important portfolio for the bank and represents a significant portion of the banking group’s overall balance sheet. “The housing loan portfolio (at RHB) grew to the high teens in 2015, on the back of similar growth in 2014 and 2013, outpacing our peers,” he notes.

“Our strong growth means that we almost had a double-digit share of the total residential mortgage market,” he adds.

Meanwhile, CIMB Bank Malaysia head of regional cards, retail assets and deposits Vipin Agrawal says its mortgage approval rates for 2016 should remain stable at around 60%.

Nevertheless, he notes that the volume of applications had softened in 2015 from the previous year. He also expects a possible drop in applications this year as customers take the “wait-and-see” approach in property purchases – especially of new high-rise homes.

“We have been prudent in credit screening for all loan applications with the review method evolving over time as new parameters are set in.”

“The economic environment continues to be challenging, but we are optimistic about greater opportunities and market resilience,” he says.

Why loans get rejected

RHB’s U says as a responsible lender, it is important to ensure that their loans do not overly burden borrowers.

“We need to make sure that the borrowers have residual income after fulfilling all financial commitments sufficient to cover their living expenses. If the total loan commitments exceed the threshold which the bank deems prudent, the loan will be rejected,” he adds.

CIMB’s Agrawal also advises customers to apply for loan amounts that they can repay comfortably every month. Applicants in the lower income group who have high commitments generally face more difficulties in getting their loans approved.

“This is because their chance of defaulting on payments is higher,” he says.

Independent mortgage broker Ideal Mortgage Specialist Sdn Bhd (IMS) relationship manager Adrian Cheong says one of the main considerations of financial institutions is the borrower’s ability to service the loan. This is based on the Debt Service Ratio (DSR), which is calculated through the total loan commitments over the total income of the applicant.

“There are more customers today who are applying for loans which do not reflect their capability for repayment,” says Cheong.

He cites fresh graduates earning between RM2,800-RM3,000 a month who want to buy properties worth RM500,000 and above as examples. “They will definitely not be able to service a loan for that amount and yet they apply for it.”

He explains that all banks used to cap the DSR at 70% regardless of income levels. However, they have recently begun to offer a lower DSR threshold of 55%-60% for those earning below RM36,000 a year. It makes a lot of sense to set different DSR thresholds for different income levels, he says.

He cites as an example the old DSR limit – 70% of RM2,800 is about RM1,960.

“After deducting that amount, you have about RM840 left. Of course, if you are extremely prudent and have no other commitments such as a car loan, then perhaps you may make it. However, realistically you still need to pay for food, rent, utilities and transport. By the end of the month, you are really just scraping by,” Cheong says.

Meanwhile, IMS head of marketing Vincent Ching suggests that first-time house buyers should be more open to properties outside city centres as many properties in cities such as Kuala Lumpur are priced above RM500,000, which is not the most ideal range for this group of buyers.

“It is not a loss living further away from city centres. You can get a property worth RM200,000-RM300,000 which is further from the city centre and may be small but it is always better to start small than to have nothing at all. “

He adds that connectivity will improve with new transport infrastructure such as the Mass Rapid Transit (MRT) line. “You just can’t be too choosy with your first house,” he advises.

According to Bank Negara’s recently-released Annual Report 2015, since 2010, an increasing number of new residential launches in Malaysia are priced above RM500,000.

In 2010, only 9% of new launches were priced above RM500,000, but this jumped to 24% and 36% in 2011 and 2014 respectively.

All four industry experts denied that property types or price ranges are factors in loan approvals.

According to both U and Agrawal, it is the repayment capability and past record of the applicant – which is revealed in their Central Credit Reference Information System (CCRIS) report – that determines the approval.

“Poor payment history on existing loans and insufficient capacity to repay can affect the loan application directly,” says Agrawal.

Ching and Cheong concur. “If you show that you can afford to repay a RM200,000 loan or even a RM10 million housing loan and you satisfy their benchmarks, there is no reason for them to withhold the loan from you,” they say.

Ching notes that via CCRIS, all credit facilities used by the applicant, including both private and public, can be traced, including past repayment records.

“If you have a high outstanding debt or you show that you always settle your loans late, this is a bad reflection of loan repayment capability. You want to have a record of paying on time. If I, as a bank, were to lend money to you, I would think twice if I see a high outstanding amount and a record of consistent late repayments,” he says.

“Even loans like the National Higher Education Fund Corp or PTPTN is captured,” he adds.

He points out that banks can also perform credit checks through credit reporting agencies such as CTOS Data Systems Sdn Bhd and RAM Credit Information Sdn Bhd to ensure that they have no bankruptcies, summons or legal suits against them, both past and present.

How to get that loan?

RHB’s U cites two key factors – the ability to comfortably service the loan and the overall existing debt burden. “To most people, a property is the biggest asset that they will commit to, so it requires planning and self-evaluation in terms of financial readiness,” he notes.

IMS’ Ching says it is vital to keep your CCRIS and CTOS reports clean.

“Pay on time and don’t have too much debt. If you have been deferring a RM200 credit card payment for several months, how can banks have faith in you for larger commitments?” Ching asks.

But that does not mean that having no credit facilities of any sort is a good idea.

“Without any credit facilities, the banks have no way of determining whether you are a good paymaster or not. One or two credit facilities [such as credit cards] with good repayment records in your CCRIS is one way to show that you are a good paymaster,” Ching notes.

Cheong adds that having a joint applicant is one way of improving the odds of getting your loan approved.

“Let’s just say you cannot afford based on your repayment capabilities, then you can apply for your loans with a co-borrower. However, make sure the co-borrower has a good repayment record and is capable of servicing the loan together with you,” he says. (See infographic).

Ching says, in the end, borrowers must evaluate their own capabilities. “If you are not able to buy a high-end property yet, perhaps you should consider buying a cheaper property or hold on first. You need to remember that buying a property is a big ticket purchase. It is a commitment you need to bear for the next 35 years.” - The Edge Property

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