BUYING a home and obtaining the right type of home loan from the bank is always a challenging task. Why, you may ask? I think everyone will agree with me if I were to say owning a home is our single and largest commitment. If you do not get a proper financing done, it can cost you thousands or even tens of thousands in interest paid to the bank.
For investors, structuring the mortgage financing correctly will be even more critical as it can mean a difference between building a wealth-generating property portfolio and never progressing beyond the first property investment.
Along my 20-year journey in mortgage financing, I have seen many property buyers who made wrong mortgage decisions which cost them huge sums of money. So, how do you make sure that you end up with the right type of property financing that will save huge sums of money?
Understanding the Malaysian mortgage industry
For the past years, we have seen many announcements made by Bank Negara Malaysia with regards to the changes in the mortgage financing climate. Many home buyers were unaware of the changes and were caught off guard. Take for instance, when I sold one of my properties, the buyer only knew that there was a 70 per cent financing cap on the third property after he paid the deposit when he went to the bank to enquire about financing.
Do take the trouble to check the latest changes in home loan policies before committing to a purchase.
Chasing the lowest interest rate
One of the hottest topics when it comes to buying a property is which banks offers the lowest rate in town. My philosophy is, “the lowest interest rate does not necessary save you the most interest”. Why is that so?
What might be seen as a good deal sometimes can come with strings attached which it will cost more in certain situations or make the loan less flexible. Always remember to read between the fine lines in your letter of offer before signing the dotted line.
For instance, you do not go to a bank with lock-in package usually between three to five per cent if you are selling in two years’ time. You should opt for a higher interest rate that does not have this clause as you will save more.
Do your homework before you go to the bank for your financing needs and also set your objective right in the first place. Go and search for a loan that suits your needs and will enable you to save the most on interest.
Understanding the bank’s loan packages
There are hundreds of different loan packages in the market. Borrowers are often spoilt for choice. Many borrowers do not do a research on the packages. At the end of the day, they take those packages that are not suitable and which will cost them to lose on huge interest.
Pre-qualifying your loan approval
This is the most common mistake that many home buyers make. Many buyers think that they have no problem getting their loans approved and many times, ignorance can lead to losing tens and thousands paid as deposit. I have seen this happen many times.
The right approach is to go to the bank before buying a property and check your credit standing. The loan officer can help to pre-qualify your loan. At least when you pay the house deposit, you pay with confidence.
How do banks determine credit approval?
Sometimes it will work to your advantage if you know how banks approve a loan. Banks use debt service ratio (DSR) to determine whether you qualify for a loan. For example, if your income is RM3,000 and your total debt is RM1,500, your DSR works like this:
RM1,500/RM3,000 x 100 = 50 per cent DTI (debt-to-income ratio)
Different banks use different ratios to determine their credit approval. Normally, banks use 33 per cent to 85 per cent.
Please be mindful that debt also includes your other borrowings such as car loan, credit card and personal loan.
Be a guarantor to someone else’s loan
According to banking info (by Bank Negara), a guarantor signs a legal contract which binds the guarantor to pay the debt of the borrower if the borrower is unable to service the loan.
Too often I have come across cases whereby the guarantor gets into trouble when the main borrower is unable to service the loan. I have even seen cases where the borrower ran away and could not be found. In this situation, the bank will go after the guarantor. The guarantor will only have two choices — service the loan or face being sued for bankruptcy. When this happens, even good-standing customers will find it difficult to obtain loans. Be careful when you are asked to be a guarantor.
No shopping around
I had a customer couple of years ago who bought a three-storey semi-detached house in Penang in 2006. At that time, she went to the bank to get her loan. The loan was approved by the bank with the condition that RM200,000 be placed as fixed deposit lien. She did not go to other banks to enquire and took up the offer. In 2009 during the economic downturn, her business took a dip and she needed the money to sustain her business but her bank was unable to release the lien. In the end, she sold her house at a loss and also had to pay a penalty of five per cent to the bank on her RM500,000 loan.
This situation could have been avoided if she had gone to various banks and shopped around. Maybe she did not even have to put in the lien. Different banks have different approval criteria. One bank’s rejection can be another bank’s approval.
Fail to plan
Having a home loan is our single and largest commitment. Many borrowers take on loans they could not even afford. It will be wise to do your own financial planning before committing yourself to any loan.
Failing to plan will also cost the borrowers to lose tens and thousands in interest. Remember, “Even small monthly savings can add to a big sum”. Making constant extra repayment to the home loan will enable the borrower to save on interest and finish the loan earlier than the original tenure.
Choosing a mortgage officer
I am very particular when it comes to choosing a mortgage officer who is going to process my loans. One of my criteria is the mortgage officer must have at least one year’s experience. This is of utmost importance as his or her experience in recommending your loan will be one of the determining factors when it comes to loan approval.
Should I buy mortgage reducing term assurance (MRTA)?
When it comes to buying insurance, a lot of borrowers try to avoid it. If you do not have life insurance, at least buy an MRTA. The MRTA will cover you in the event of death or permanent disability. Even if you have life insurance, you can still purchase MRTA for extra protection for you and your family. MRTA is cheaper than a life policy but the coverage is limited.
The writer is chief executive officer and founder of GM Training Academy PLT