Update: Corrected the formula for Net Income calculations. Credit to www.propertywtf.com
Loan’s application declined to RM45.26bil from RM47bil!
The Bank Negara had showed on their website that loan approvals’ percentage for residential properties in the country declined to 46.8% in the first half of this year from 50.1% during the same period in 2011. While the application for loans for residential properties purchases increased by 2.9% but the actual loans approved during the six-month period declined to RM45.26bil from RM47bil in the same period in 2011.
This is evident when our clients have to resort to different banks when they buy their properties and this prolonged the property transactions period.
Why declined and how it is assessed?
One of the reasons for the increasing numbers of bank loan disapproval is because of the recent change of policy by Bank Negara to use Net Income instead of Gross Income of borrowers in approving loans.
From our recent meeting with a local bank manager on this policy, he explained that if a person:
- Has a salary/total income of RM3,000.00 a month (after deductions of EPF and SOCSO)
- Has a car commitment of RM500.00 a month
- Other commitments of RM1,000.00 a month (house, credit cards etc)
- His net income would be RM 1,500.00 but the bank will take 70% out of this net income to calculate his eligibility for another loan. That would mean the person is eligible for a loan of monthly instalment not more than RM1,050.00
Of course this calculation is just a guide and different banks have different rules in calculating a person’s eligibility.
Based on a this person’s net income of RM1,050.00 and on the basis of a tenure loan of 30 years and interest rate of BLR-2.4%, he is eligible for a housing purchase of RM230,000.00 (with 10% down payment).
In getting your bank loan approved, there are four factors that you must be prepared:
- Your Net Income
- Proof of your Net Income
- Your Purchase – it must not be risky in the view of the Bank.
- Your Credit Rating
To help you in getting your loan for residential purchase approved, we compile for you 20 Tips to Increase the Success of Your Home Loan’s Application based on our interviews with bankers, investors and experience in dealing property transactions.
While we cannot do anything on the increasing price of properties in Malaysia nor can we ask our Boss for a raise of salary in light of the inflation of our country (you can try, if you want to!), we can only work out other ways.
#Tip 1 – Sort out Your Eligibility
Before you commit yourself into any purchase of property, sort out your eligibility first. Get advice from your banker and get them calculate your loan’s eligibility and work out how much the price of a property you can afford.
Approach different banks and let them review your credit eligibility. You must be honest with them and tell them your salary, income and total expenses. There is no point in getting your bank loan approved based on false credit report while you struggle to pay your bank loan later.
Our illustration above on the net income can also be a guide to determine your purchasing power.
Based on your eligibility, if you know that you can only settle for a property priced at RM 250,000.00, don’t try to make a purchase of RM 450,000.00.
Also, you need to take into consideration of the hidden costs involved in acquiring your property.
#Tip 2 – Build Your Passive Income
The rule of Net Income is simple:
Net Income = Salary – EPF – Monthly Tax Deduction (PCB) – SOCSO
They will then use your net income to derive your Loan Repayment Ratio/Debt Service Ratio = New + current loan repayment commitments/Net Income
It’s either you cut your expenses and liabilities (such as credit cards instalments, car commitments etc) or you build your income.
While it is almost impossible for you to speak to your Boss in front of his face and ask for a raise in your salary (you can try!), what is better for you to do is build your passive income or other side income. While you can work part time during the night or weekends, what is better for you to do is build your passive income – income that you can earn without you having to work for it.
There are many ways you can do this:-
- Rent out your empty rooms in your house
- Build business – can start small by having a stall selling fried chicken manned by another and expand to having several stalls
- Write eBooks or create products and sell online
- If you already own several properties, your rental income can be part of your passive income – but be ready to deal with problematic tenants!
The opportunities are endless. It’s just a matter of whether we want it to happen.
#Tip 3 – Cut down your expenses, liabilities or commitments – Bad Debts
Robert Kiyosaki – the author of Rich Dad, Poor Dad said in this book we need to identify which is bad debt, which is good debt.
“Get rid of debt,” that’s Robert kiyosaki main advise, but you have to distinguish between good debt and bad debt:
“If you’re financially educated, like my rich dad, you know there’s good debt and bad debt. Bad debt makes you poor,” Robert Kiyosaki says. “Good debt makes you rich. Today, I’m hundreds of millions of dollars in good debt.”
“Good debt puts money in your pocket, and that’s the difference,”
Robert Kiyosaki is a real estate entrepreneur and co-author of “Rich Dad, Poor Dad
While many of us cannot restrain from buying or spending on things we think we should own after working so hard to earn our income and use credit cards or make purchases on credit, we should stop and think whether what we are buying good debt or bad debt.
If your car loan and additional costs of owning a car is taking up half of your income, maybe you should ask yourself whether you should settle for cheaper car or means of transportation.
If your purchases on credit term are eating up half of your salary, you should ask yourselves whether what you have purchased is a good debt or bad debt. Maybe you should sell off your items and settle the credit card or purchase second hand goods in future for a lesser price.
# Tip 4 – Joint Purchase with Your Spouses, Children, Parents, Close Friends or Partners
If your credit eligibility is RM 250,000.00 and your wife is earning similar income, you can joint purchase the property with your wife. The combined credit eligibility would be RM 500,000.00 and you can easily acquire a loan of RM 400,000.00. You can also joint purchase with your children, parents, and close friends or with investment partners.
The only thing is – make the joint purchase with someone you can trust and get a good lawyer to draft your agreements of share.
# Tip 5 – Make Higher Down payment
A higher down payment would mean lesser loan amount and instalments.
Settle for a higher down payment if you could – this can either from your EPF withdrawals, insurance fund withdrawals, borrow from your parents and or relatives (but not Ah Longs, please!).
In proper finance strategy, you can also refinance your current property and use a portion of your money from the refinancing for a larger down payment. To do this, get proper advice from your banker and wealth advisers before you commit anything.
# Tip 6 – Longer Tenure
You can stretch up your loan to 30 or 40 years tenure and spread out your instalments. Some bank also offer loan up to 60 years or 70 years of age. Of course the longer your loan tenure is, the higher the interest you need to pay.
But believe it or not, with the inflation rate of our country plus the law of scarcity your property would be priced at the same price of your total payments or more by the time you settle your loan. You can also make prepayments with your EPF money to shorten the tenure and interests when times come.
# Tip 7 – Look For Bargain Property
The No.1 investment advice is –
“Buy low, sell high!”
While it is almost impossible to find bargain properties nowadays, it is still possible for you to find one if you go further looking for one. There are still people who would sell their properties for lesser sums for many reasons – migrating, in need of money for business, divorcing etc.
We once had a client who sold his property at a price much lower than market value because of matrimonial matter.
These properties normally won’t go public and even if it does, it would be taken up very fast. So the key is networking.
# Tip 8 – Negotiate with the sellers or come to an arrangement with the sellers
Some sellers or vendors are friendly and good enough to make some arrangements in your favour. This can be an arrangement for say you pay the vendor a larger sum of down payments but in instalments over a fixed period, with or without interest. In this way, you need not obtain higher margin of loans and it’s easier to get your loan application approved.
Also, the bank is able to see your commitment in buying this property as they may think that you have paid large down payment to secure your property. In this circumstance, it is very unlikely you would want to see your property being auctioned for defaults of payments.
Or, maybe make the Sale and Purchase Price higher to get a higher loan so you don’t have to pay for the down payment? But this may work against your objective as the main concern here is about getting your loan approved – the only reason it is not approved is because you’re borrowing too much. So unless you find one undervalued property, it is very unlikely that you will be able to use this strategy as bank normally value the property lower than the sale and purchase price.
# Tip 9 – Shop for Banks just like how you shop for clothes
Don’t settle for only one bank. There are plenty of banks in our country both local and international banks. Some banks albeit Bank Negara policy, maintain lenient policy in approving bank loans than the other.
It is advisable that you always approach banks and get their letter of offer before you sign any Sale and Purchase Agreements or bookings. Negotiate with the seller to allow you a certain time to get bank loan while reserve the property for you. Once you get the letter of offer from bank, you need not to worry about losing your booking fees in case of failure of getting a bank loan.
If you approach more banks, you will be able to compare their interest rates and other benefits and get the one benefited you the most.
# Tip 10 – Look for Tenanted Property
This is common for many investors. If you are new in investment and is buying the property for investment purpose, settle for a property currently tenanted. You may be thinking why the landlord would sell the property while he is earning passive income. This could probably because the landlord is adjusting his portfolios; he needs large sum of money to finance his other purchase or for his children tertiary educations. The reasons are endless; you just need to find the right property.
If the property is currently tenanted, this can be part of your guaranteed future income which most banks will take into consideration. Show to the bankers the Tenancy Agreement. The longer and higher rental the property is currently tenanted the better. If it is rented to good companies like 7-11, even better.
# Tip 11 – Have Proper Bookkeeping
The bank normally wants to see your income statements to determine your credit eligibility. While some may only ask for your pay slips, most would require you to produce your income tax statement/report.
In this case, you cannot lie to your bankers about your total commitments because they can check your commitments (other existing loans) from their integrated system linked to Bank Negara.
If you could produce to your bankers your detailed financial statements including your total incomes, total expenses – this would help in assessment of your credit eligibility because the bank doesn’t have to estimate or second guess your expenditure and can make correct assessment of your credit eligibility.
# Tip 12 – Report and Pay Your Tax Accordingly
Nowadays banks are stricter in assessment of their customers’ credit rating.
They request customers to produce their income tax statements. If you’re a business owner and you tell your bankers you are making RM 500,000.00 a year but if you only report your profit as RM 250,000.00 as reflect in your income tax statement, the bankers would take the RM 250,000.00 in their assessment.
Therefore, unless you have better solutions and are not leveraging on the bank’s money in your property purchases, it would be wiser for you to report your profit accordingly and pay your tax accordingly.
Get proper advice from Tax consultants to assist you in this matter.
# Tip 13 – Pay your Credit Card and other commitments on time
Always maintain a good credit rating by paying your credit card and other commitments (loans) on time. When the bank lends you the money, they want to ensure that their money will be paid back on time. This is the risk that the bank needs to evaluate and it makes sense that if you’re a good payer who pays on time the bank will love you to be their customers who borrow from them. They know that you will be able to pay what you borrow and make money for them.
It is often very difficult for a person who does not pay on time or who has been blacklisted from the bank or other banks to get their loan approved.
Mind you that they have an integrated system that is able to track your history or track record with other banks or at least they know whether you’ve been blacklisted.
# Tip 14 – Pay off your credit cards!
This is interrelated with # Tip 3 and # Tip 12. If you are buying too many things on credit cards and by instalments or easy payments, beware that your loan application may not be approved. Simply – the bank think that you have too much commitments and aren’t good at financial management. They may also think that you may somehow unable to pay your credit card and the loan. So unless and until you can prove to the bank that you’re earning more than you spend, be careful when spending with credit cards as your may go on with shopping spree and splurged your spending budget.
# Tip 15 – Build and maintain good rapport with bankers
It is very important for you to build and maintain a good rapport with bankers. They are the ones who will facilitate and in some situations approve or involve in the process of approving your loan applications. If you could build your rapport and they trust you being a good payer, this may help in your loan getting approved.
Also, if you build your rapport with fellow bankers, they will help you in persuading their superiors to approve your loan or get their superiors to review your loan applications. If they don’t know you, most of them would ignore your application once their superiors disapprove the applications.
# Tip 16 – Readjust your portfolio
If you own too many properties with the bank’s money and they are generating negative cash flows for you, you may need to readjust your portfolio. It may be wise for you to sell off your negative cash flow property or those not making money neither appreciate in value to cash your new purchase. This way, the bank will be able to see that you’re more than able to finance the loans.
# Tip 17 – Have a Guarantor who has good financial background
To ensure that your loan is approved, you can also get a guarantor for your loan. Of course this person must have good or positive income statement. If in the absence of you paying the bank loan and you have a guarantor who is capable of paying the bank loan then it is very likely that the bank will approve your loan application.
Be wary that a guarantor will be liable for the instalments in default of you paying the loan and is also liable to be sued for bankruptcy. Further, this guarantor’s credit eligibility will be taken up by being a guarantor for your loan. This means that if he becomes a guarantor for your RM 300,000.00 loan, this RM 300,000.00 will be taken as his own loan when the banks assess his loan application.
# Tip 18 – Choose your location of property purchase wisely
When buying your property, always follow Ho Chin Soon Real Estate Mantra–
Location, Timing and Branding!
This is also particularly important when getting your loan approved.
Some banks only finance purchases of properties in certain locations. Some banks also look at who are the developers. This is logic considering that banks are money making institutions and they want their money to be safely returned. If you make purchases at secluded area at high price but with no potential to grow, the bank will be wise not to lend you the money.
The same is true if you make purchases from developers who are popular for not keeping their promises or new developers who cannot prove their credibility, the banks are unlikely to lend you the money to purchase properties from these developers.
The rule is simple – if you can’t pay the loans, can the bank recover the money back by auctioning your property? If they can easily auction your property means they are likely to lend you the money. If they think there is no taker for your property, they won’t lend you the money. They always think of the exit route before they make an entrance.
# Tip 19 – Shop for Loan Packages Just Like How You Shop for Combo Meals
There are many types of loan packages offered by different banks. Some offer graduate loans that only require you to pay less in the early years and gradually increase over the years, others offer Islamic loan or interest only loan for under construction properties. Whatever package you choose, choose the one that you think best suit you taking into consideration of the interest rates and sum of instalments.
If you believe you are only able to pay less in the early years as you have just graduated with a degree and you strongly believe that your salary will increase as times goes by, take up this package. The bank will very likely approve your loan based on this package instead of approving your loan with high instalments in the early years.
If you think you can flip the property after the property is completed but you don’t have strong ability to finance your property during construction, take up the ‘interest only’ package albeit the higher interests.
# Tip 20 – Be Confident!
This is going to be the last tip – be confident in whatever you do – just like when you present your case to the banker!
Show your confidence in your ability to pay the instalments by supporting your applications with various documents. Show to the bankers that you’re able to finance your property just like how you tender your proposals for your boss to accept your idea.
Bankers want to hear their investment in you will reap fruits. So tell them that their investment by lending money to you will not make them suffer losses.
Plan your exit before you enter. As Robert Kiyosaki always say ‘has an exit strategy in mind’ in whatever business you do.
We hope you can get your loan approved in no time and own your very dream property.
To prepare yourself in purchasing your property, read our 7 Steps Your Must Know When Buying Your Dream Property!
Give us your feedbacks and or comments regarding the tips we have given. Either way, if you have something to add on, let us know! We would love to hear from you!
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