The borrowing environment may be more difficult nowadays, but this is the time to improve our financial standing and credit rating
Ten to 15 years ago, most people talked about investing in the stock market. You can even hear people in the lifts or coffee shops discussing which stocks to buy. Five to eight years back, you hear lively conversations about making money through property investments. Today the buzz in town is the tightening of the lending policy by Bank Negara. We have to acknowledge that it is more difficult to get financing in today’s market but the bank’s lending will still have to go on.
It all started in late 2010, when Bank Negara capped the margin of finance to 70 per cent for borrowers with more than two property mortgages onwards. Then on 1 January this year, when the new lending guidelines were intro- duced, banks are required to use Nett income instead of Gross income to compute the Debt Service Ratio for housing loans approval. The new lending guidelines also cover credit cards, personal loans and car loans, and loans for purchase of securities.
Since the enforcement of the new lending guidelines, loans growth for January came down to 12.1 per cent year on year (y-o-y) as compared to December 2010 at 13.6 per cent y-o-y.
The total loan application was down almost three per cent from a year ago. I expect the loan growth to moderate this year to about eight per cent to 10 per cent but this also depends on whether Bank Negara will introduce more new measures to curb the lending industry.
I personally feel that the move by Bank Negara is timely to prevent a property bubble. The new guidelines will require the banks to do a more thorough assessment for individual lending and also to make sure that they do not lend beyond the borrowers’ capacity to repay the loan. We can see from Bank Negara’s latest report that household debt has been increasing over the years and this is alarming.
To all new property buyers and investors, do not worry because this is not the end. In fact, I look at this as a new beginning. No doubt borrowing will be more difficult from now onwards but banks are still keen to lend. The difference is that now the banks are more prudent in lending and prefer to lend to borrowers with good standing. Borrowers will now have to prove to the banks that they have the capacity to service the loans.
We acknowledge the fact that personal financial planning is very important in today’s market and most people know that, but how many actually practise it. If you can show to the lending bank that you are managing your money and your reserves are able to service the monthly installments for many months even if you are out of a job, then the banks will be more than willing to lend you.
Apart from this, borrowers will also have to understand how the banks approve a loan. Do not panic if one bank rejects your loan as another might approve it. Different banks have their own lending policy on top of Bank Negara’s guidelines.
The most important aspect that the banks are using to gauge the repayment capacity of a potential borrower is through Debt to Income Ratio (DTI) or also known as Debt Service Ratio (DSR) by most banks. DSR will calculate what percentage of your income goes towards the payment of your debt. For example, if your income is RM5,000 and your total monthly debt payment is RM2,500, the calculation goes like this:-
RM2,500 (Debt)X 100=50% (DTI)RM5,000 (Income)
It is wise to know your own DTI before submitting your loan application to the bank. Different banks have different DSR levels ranging from 30 per cent to 75 percent. If your DTI falls below this level, then your loan will most likely be approved.
Another important tool that the banks use to determine credit approval is checking on the individual’s CCRIS (Central Credit Reference Information System) report. The CCRIS report houses all the credit data of a person which includes housing, commercial loans, credit card, personal and government loans. If the borrower were to default any of the loans, it will be reflected in this report.
It is crucial that the borrower pays all the monthly installments on time. Any late payments will be reflected in CCRIS and if the banks see this as a trend in the report, most likely the loan will be rejected even though the borrower meets all the other qualifying criteria. I encourage everyone to go and print your own CCRIS report at least once a year. Just go to Bank Negara and make a request, the report is printed for free.
My advice for those of you who are unable to get your loan approved by the banks, do not act hastily but to improve on your financial standing and credit rating before going back to the banks for borrowing.
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