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 largest commitment in our lifetime. If you do not get proper financing done, it can cost you thousands or even tens of thousands in interest payment alone to the Bank.
For Investors, structuring the mortgage financing correctly will be even more critical as it can mean the difference between a profit or a loss. This can be the difference between creating a wealth generating property portfolio or never progressing beyond the first property investment.
Throughout my entire 14 years’ 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 will end up with the right type of property finance that will save you thousands in interest?
Here are the 10 biggest Home Loan Mistakes made by loan borrowers which I have gathered throughout my career in Mortgage Financing.
Understanding the Malaysian Mortgage Industry
For the past one year or so, we have seen many announcements being made by Country Bank with regards to the changes in the mortgage financing climate. Many home buyers are still unaware and were caught off guard on the recent changes. Take for instance, recently when I sold one of my properties the buyer only knew that there is a 70% financing cap on third property after he paid the deposit and went to the bank to inquire about financing.
With the new announcement on 100% financing with properties costing between RM100,000 to RM400,000 do take extra precaution on the loan approval by the banks. It’s rather rigid with many requirements that needed to be met. My advised for those who are going for this type of loan is to go to the bank and check the loan approval requirements before committing on the purchase.
For home buyers or investors who are buying new properties, do take the extra trouble to check on the latest changes before committing on your purchase.
Going for the lowest Interest Rates
One of the hottest topics when it comes to buying a property will be “which bank is offering the lowest rate in town”. My philosophy, “The Lowest Interest Rate does not necessary save you the most Interest”. Why is that so?
What might be seen as a good deal can sometimes come with strings attached whereby it costs more in certain situations or the loan offers less flexibility. Always remember to read (no need to have the word “between” because you do not need to read between the lines) the fine prints in your loan Letter of Offer before signing on the dotted lines.
Be very clear about your objectives for getting the loan and do your homework before you go to the Bank for your financing needs. With the objectives set, go and search for a home loan that suits your specific needs and objectives, and enables you to save the most interest.
Understanding The Bank’s Loan Packages
There are hundreds of different innovative types of loan packages out in the market. Borrowers are often spoil for choice because there are too many to choose from. Many borrowers do not do research on the loan packages and at the end of the day take packages that are not suitable for their specific needs and goals, costing them to lose large amounts of money in interest payments to the banks.
Pre-Qualifying Your Loan Approval
This is the most common mistake that many home buyers make. Many home buyers thought that they have no problem in getting their loans approved and often time ignorance can lead to losing tens of thousands paid as deposits. 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 qualify your loan. At least, when you pay the house deposit, you pay with confidence.
How Banks Determine Credit Approval?
Sometimes it will work towards your advantage if you know how the Banks approve a loan. Banks use, Debt to Income Ratio (DTI) to determine whether you qualify for the loan. For example, if your income is RM3,000 and your total debt is RM1,500 your DTI works like this:-
RM1,500/RM3,000 X 100% = 50% DTI
(Debt) / (Income)
Different Banks use different ratio to determine their credit approval. Normally, banks approve loans with DTI ratio of between 33% to 70%. The recent announcement by Bank Negara on using Nett instead of Gross income when it comes to loan approval will greatly affect the DTI ratio.
Please be mindful that debt also includes your other borrowing such as car loans, credit cards and personal loans.
Be a Guarantor for someone else Loan
According to Banking Info (by Bank Malaysia), a guarantor will sign 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 cannot be found. In this situation the bank will go after the guarantor. The guarantor will only have 2 choices either to service the loan or face being sued for bankruptcy. When this happens, even people with good financial standing will find it difficult to obtain a loan. Be careful when you are asked to be a guarantor.
No Shopping Around
I had a customer some years ago who bought a 3 stores semi-D in Penang. At the time of purchase she went to the bank to get her home 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 inquire 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. At the end she decided to sell her house at a loss and she also had to pay a penalty of 5% on her RM500,000 loan.
This situation can be avoided if she had gone to various banks and shopped around. Maybe she did not even have to put up the lien. Different banks have different approval criteria. One bank’s rejection can be another bank’s approval.
Failure to plan
Having a Home Loan is our single largest commitment. Many borrowers take on loans they cannot even afford after taking into account their income and expenses. It will be wise to do your own financial planning before committing yourself to any loans.
Failing to plan will also cause the borrowers to lose tens and thousands in interest. Remember, “Even small monthly savings can add to a big sum”. By making constant extra repayment to the home loan will enable the borrower to save a lot in interest and also to finish the loan much earlier than the original tenure.
Choosing a Mortgage Lender
I am very particular when it comes to choosing a mortgage officer who is going to process my loans. One of my criteria is that the mortgage officer must have at least 1 year’s experience. This is of upmost importance as their experience in recommending your loans will be paramount to determining your 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 a life insurance at least buy MRTA. MRTA will cover you in the event of death or permanent disablement. Even if you have life insurance you can still purchase MRTA for extra protection for you and your family. MRTA is much cheaper than the life policy but the coverage is limited.
I hope my article will help you to gain more knowledge of the mortgage industry in Malaysia and will assist you to prepare for your upcoming property purchase.