This article first appeared in City & Country, The Edge Malaysia Weekly on November 15, 2021 - November 21, 2021

Janice, 27, recently got engaged and is excited to purchase her first home. As a young first-time homebuyer, however, she feels overwhelmed by all that she has to do, including financing the purchase of her house. How does one apply for a housing loan and what are the factors to consider?

According to PPC International Sdn Bhd managing director Datuk Siders Sittampalam, a home loan, also known as a mortgage loan, is the sum of money borrowed from a bank or financial institution to assist in purchasing a property. The house is mortgaged to the bank as a security or collateral until the loan is completely repaid and the repayment, including interest, will be settled by the instalments for a fixed period.

“The borrower and financier will then enter into a loan agreement and the loan is typically paid back over a term of up to 35 years, or until the borrower turns 70. In most cases, the margin of financing based on the value of property is 80% to 90%,” says Siders.

Henry Butcher (M) Sdn Bhd chief operating officer Tang Chee Meng notes that, after one decides to purchase a property, one has to work out how much financing is required to bridge the difference between the price of the property and savings available to pay for it. Based on the developer or real estate agent’s advice, the borrower will then compare the loan packages offered by the banks on the developer’s panel of financiers.

“The borrower then contacts the bank that he feels is offering the best package and checks on his eligibility and procedures,” says Tang, adding that one may also apply to more than one bank to secure the best package.

Subsequently, documentation such as a copy of the borrower’s identification card, salary slips, Employees Provident Fund (EPF) statement and latest bank statement will need to be submitted for the bank to evaluate the borrower’s eligibility.

Before submitting an application, Tang says, borrowers should be familiar with the loan principal, which refers to the amount of money that they intend to apply for and that is usually derived after deducting the down payment. Next is the loan tenure, which is the term of the loan, which can range from 10 to 35 years, depending on the borrower’s age. Lastly, look at the interest rate, which is the amount charged by the financier for the loan taken up,  which is commonly expressed as a percentage of the loan principal and varies from bank to bank.

“The borrower must also be aware that the amount of loan that he can qualify for will depend on his age, net income available after deducting repayments for other existing loans, living expenses, credit history  (Central Credit Reference Information System — CCRIS), whether the property is for own stay or as an investment, and the type and location of the property that he intends to buy,” he explains.

Tang highlights that, before applying for a home loan, the borrower must be well informed of the loan features or packages offered by different banks and carefully assess which mortgage insurance plan fits his plans. He should be able to gauge his loan eligibility by getting a pre-assessment check with the financier before committing to the property purchase to avoid under-qualifying.

The borrower may also apply under either a joint application, which usually involves immediate family members, to better qualify for the loan, prepare income documents in advance for easier submission, as well as ensure his repayment conduct on all existing loans is up to date with no outstanding payments due or arrears, as it will affect his scoring and loan risk. So, it is crucial to tidy up one’s loan repayments before submitting a loan application.

In Malaysia, there are three types of home loans — term, semi-flexi and flexi— each with a different way of processing instalments and interest rates.

“Term loans come with a fixed repayment schedule and the monthly instalment is the same throughout the duration of the loan. This type of loan does not allow the borrowers to reduce their loan interest through advance payments and any additional payments made will be treated as pre-payments for future instalments. The additional payments will neither help to save loan interest nor earn interest as a deposit,” says Siders.

Semi-flexi loans are more flexible in terms of reducing loan interest, whereby borrowers can make advance payments to lower their interest payable without having to inform the bank. “Any additional payment made on top of one’s usual monthly instalment will reduce the principal loan amount, thus reducing the interest charged. Borrowers can also withdraw any additional amount paid ahead of the loan’s schedule, but a processing fee for the withdrawals will usually be imposed and require written notice, depending on the bank,” he notes.

Flexi loans, on the other hand, will allow borrowers to make advance payments to lower their housing loan interest and withdraw the additional payments they have made whenever they need without incurring processing fees or providing a written notice to the bank.

“The borrower’s housing loan will be linked to his current account, whereby the instalment amount is automatically deducted monthly from there. Any additional payment to the current account will be used to reduce the principal loan amount and interest charges. Borrowers can do all of these without having to deal with the complicated process or additional incurring fees. Take note, however, that certain banks offer only flexi loans,” says Siders.

According to Tang, home loans generally take five to seven working days to be approved, depending on the financier and borrower’s overall profile as well as credit score. Banks will request confirmation of the borrower’s particulars from CCRIS and EPF. Additional documents may be required if the bank raises concerns about the borrower’s repayment capability, which will further delay the process.

If the application is delayed, it may be because the loan applied for has exceeded the borrower’s eligibility. “As such, the borrower has to provide an alternate source of income such as a unit trust fund or fixed deposit account as support, to prevent the loan application from being declined. If deemed insufficient, a joint borrower may be required. Once approval is granted, the bank will issue an official letter of offer, which includes the terms and conditions of the loan approved for the borrower’s final consideration,” Tang notes.

There are times where loan applications are rejected,  he says.  “This may be due to the borrower’s unfavourable credit score, weak repayment conduct and inability to submit the required documents or flaws in the documents prepared. Also, different banks have different policies, so an application may be accepted by one bank but rejected by another.

“Therefore, borrowers should be well prepared by keeping track of their debt repayment and pay on time, and have a good employment record, which will mitigate the risk of the bank and help them fight for a higher chance of obtaining approval.”

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