What do you need to consider when applying for your home loan? It’s a question that everyone thinking about entering the property market will have to think about. And being the investor confidante’s that we are, we’ve decided to help clear the air for you and provide you with a nice concise write-up of all the things that you should bear in mind when applying for a home loan.
In the past year or so, Malaysian banks have made it increasingly difficult for people to get home loans. Bank Negara’s latest data from earlier this year showed that the approval rate for residential loans in the country has slumped to just about 42% from 2016’s 73.8%! So, it’s imperative that you give yourself the best chance of getting approved by taking note of all the following details.
Debt Service Ratio (DSR)
The most basic thing you should look at first is your DSR or Debt Service Ratio. This is percentage amount of your income that the bank feels you will be able to commit to repay your debt to them after taking a loan. As a rough guide, this should normally be 70% of your income inclusive of all your other commitments. These commitments could be your car loan, your credit card repayments and any other form of debt that you have to your name.
For example, let’s say you earn RM 5000 and you have a car loan which costs you RM 800 every month. So, this will mean that you can service a loan repayment comfortably (in the bank’s eyes at least) of 70% x RM 5000, which is RM 2940 per month. This RM 2940 includes your car loan repayment of RM 800, meaning that the maximum repayment on your loan can only be RM 2140.
That is just a rough guide however. Different banks look at income differently and some have different ways of calculating DSR. It’s important to remember to include all your sources of income including foreign income and rental income as well. Some banks will also allow up to 80% for your max DSR. (it’s very circumstantial however, so don’t base it on this figure when doing your own calculations) Another important thing to do, is to only provide documents that the bank specifically requests for, do not list down all your commitments including your hand phone bill and savings plans, this will only reduce your likelihood of being approved. Just be smart about it, we are in no way encouraging you to be dishonest.
Loan To Value Ratio (LTV)
The second thing you should look at, is the LTV or Loan to Value Ratio. This is the percentage of amount that the bank will lend you based on the property price. So, this amount will determine how much of the down payment you will need to come up with. For first time buyers, this is normally a good 90% of the property price meaning you’ll only need to come up with 10% of the property price for the down payment. Banks will also sometimes reduce this amount for certain projects when they know that the property is being bought fully or partially furnished. The banks are only keen to lend you for the property price and not for additional things like furniture. The LTV also goes down to 70% once an individual has two or more home loans under his own name. It also varies significantly for non-Malaysians even if they are living and working in Malaysia.
The last thing is to ensure you would need to consider is your credit score. You can get this done through a number of ways, either by checking with Bank Negara directly – here or through CTOS – here. This is just an account of your financial credibility as the bank wants to know whether you have taken loans before and if you have paid them back on time. CTOS gives you an idea of what scores are considered good by banks – here. So, long as you haven’t defaulted on any loans and you pay your credit card bills punctually, you should have a decent enough credit score to be considered not a risk for the bank.
Make sure you have covered all you need to consider when applying for your home loan before you speak to any of the banks. This will allow you to plan your purchase accordingly and prevent any surprises from showing up at the last minute. Taking up a home loan is a big long-term commitment that you’ll likely have for many years, so you’ll want to make sure it’s done right especially in the current market. It’s to your best interests to ensure that everything that needs to be considered when buying a new investment property has been thought of right from the beginning of your property investment venture.