Consumer Guide on Getting a Housing Loan

Buying a home is a big financial decision for most of us as it is a long-term commitment. Choosing the housing loan to pay for the new home is just as important. Both these decisions require careful planning in order to choose the right home and the right housing loan that best suits your personal needs.

In making these decisions, you are advised to follow these guides:

What to bear in mind?

• Borrowing money costs money. It is important that you borrow what you need to borrow and not what you can borrow.
• Borrowing money becomes a problem when you borrow more than you can afford.  You should work out how much you can afford to repay every month based on your monthly income, expenses and debt repayments.
• Apart from your housing loan repayments, consider whether you can afford other costs of homeownership such as assessment fees, quit rent, fire insurance, management service fees and utilities bills.
• You need to make sure you will be able to cope with future events such as higher interest rate and changes in your financial situation.
• Make sure you buy a home that you can afford.

How much can I afford to borrow?

1. Firstly, look at your savings and determine how much you can afford for a down payment. The bigger the down payment, the smaller your housing loan which can save you a lot of money in interest charges. Generally, financial institutions would offer a housing loan up to 90% of the property value. In other words, you need to pay for the remaining 10% of the property value with your savings. Check out how much can you afford a house with your salary.
2. Apart from the down payment, there are many costs associated with purchasing a home. The financial institution will require a professional valuation of the property to establish how much the institution is prepared to lend you. The valuation fee will be borne by you. Some financial institutions charge loan processing fee before the loan is disbursed. You will also need to pay two sets of legal fees, one for the execution of the Sale and Purchase Agreement and the other for the loan agreement prepared by the financial institution’s panel lawyer. There may also be fees for the Memorandum of Transfer of the ownership of your property.
3. Next, you need a clear idea of how much you are currently spending to work out what you can comfortably afford to service the monthly loan repayments. Your current spending will include all your monthly:
   • living expenditures (e.g. transportation, food, telecommunication, etc.)
   • current loan repayments (e.g. car loan, credit card, personal financing, etc.)
   • other financial obligations (e.g. child maintenance, life or medical insurance)
4. You should also take into account the other costs of homeownership such as quit rent, assessment fees, fire insurance, utilities bills and management service fees, if applicable.
5. This will give you an idea of how much you could afford for the monthly housing loan instalments. Many financial institutions’ websites have housing loan calculator to help you estimate the amount you could borrow based on the monthly instalments you can afford to repay.
6. You also need to set aside some funds for repairs and home maintenance.

Which housing loan is right for me?

• Different housing loans have different features to meet different customer needs. Make sure you understand the options and features when you shop for a housing loan. This will help you choose a loan that best suits your needs and financial circumstances. Two key factors are the loan tenure and interest rate type.
• The loan tenure refers to the length of time it will take you to fully repay your housing loan. The longer the tenure, the lower your monthly instalments. However, the longer you take to pay off your loan, the more you will pay in interest charges. The maximum tenure for a housing loan is 35 years. For a housing loan of RM300,000 with interest rate at 4.65%, the total interest charges for 35 years would amount to RM308,061.
• If your housing loan tenure extends into your retirement age, you should have a plan on how to service your repayments after your retire.
• Interest rates come in two major categories: fixed and floating rate. The interest rate for a fixed-rate loan will stay the same for the entire loan term or for a specific period (e.g. 5 years). At the end of the fixed rate term, the housing loan will switch to a floating rate. A fixed rate home loan has two key advantages:
  1. It makes budgeting easier as you know the monthly instalments will be fixed during the specified term or the entire loan tenure;
  2. It safeguards you against future rise in interest rate. However, you will not benefit from any reduction in interest rate.
• As for a floating-rate loan, the interest rate can rise and fall during the loan tenure. The interest rate is usually tied to the Base Rate. Your financial institution must disclose how the Base Rate is derived and the possible scenarios that could result in a change to the Base Rate.
• The key advantage of a floating-rate loan is that any decrease in the interest rate will reduce your monthly repayments. The opposite also applies, your monthly instalments will increase if the interest rate goes up. Keep in mind that the rise and fall of interest rates are difficult to predict. Make sure that you will be able to adjust your budget in case your monthly repayments increase.
• Some financial institutions may offer a promotional rate for the first 3 to 5 years to attract new customers. Before you accept a promotional rate offer, make sure you know what rate you will pay and how much your monthly instalments will increase when the promotional rate period is over. The financial institution may impose an early settlement penalty if you fully settle the housing loan before the end of the promotional rate period (commonly known as the lock-in period).

How do I compare housing loan packages?

• The best way to compare housing loans is to request for a housing loan Product Disclosure Sheet (PDS) from the financial institutions (see the attached sample).
• Use the PDS to compare the effective lending rate, monthly instalment, total repayment amount, lock-in-period, early settlement penalty, fees and charges.
• The effective lending rate and total repayment amount allow you to compare the total costs of borrowing for different housing loan packages with varying interest rates and loan tenures.
• The PDS will also tell you how a rise in the interest rate affects your monthly instalments and the total repayment amount over the life of your loan.

How financial institutions make credit decision?

• Each financial institution has its own internal policy and credit assessment criteria. Generally, to qualify for a housing loan you will have to prove to the financial institution that you can afford to repay the loan throughout the loan tenure. The financial institution will need information on:
  1. your income after statutory deductions (i.e. tax, EPF, SOCSO);
  2. all your current debt obligations from financial institutions and other credit providers (e.g. co-operative society, and merchants that provide credit sales).
• If you have no permanent employment or are self-employed, the financial institution would assess the stability of your income over a period of at least 6 months.
• The financial institution will assess your ability to meet monthly repayments based on the debt service ratio (DSR):
  
• Financial institutions must set a prudent DSR level to make sure that you have sufficient financial buffers to deal with any unexpected adverse events (e.g. future increase in interest rate, any changes that might affect your income or expenses in the future).
• Financial institutions would also consider the nature of your employment, the number of your dependents and other factors that have a bearing on your monthly expenditures and future income growth.
• If you earn less than RM5,000 per month and live in urban centers (i.e. Kuala Lumpur, Penang, Johor Bahru) or if you live in other areas but earn less than RM3,000 per month, financial institutions generally set the DSR at 60%. In other words, you monthly debt repayments including the new housing loan should not exceed 60% of your net income.
• If your income is not sufficient to repay the amount you want to borrow, you would need to reduce the housing loan size or your other existing debts.

What if interest rate rises?

• If your housing loan is based on a floating rate, the interest rate would change according to changes in the Base Rate of the financial institution.
• Assuming you borrow RM300,000 for 35 years with a rate of 4.65%, your monthly repayment is RM1,448. If the interest rate rises by 1% you have to pay an extra RM193 per month. The total interest costs increase by RM81,009 at the end of the loan tenure.
• If the interest rate increases by 2% you have to pay an extra RM395 per month and additional total interest costs of RM166,195 at the end of the loan tenure.

What information do I need to provide with an application?

1. Latest 3 months salary slips and evidence of your other income (e.g. rental income).
2. Latest EPF statement or income tax return form.
3. If you are self-employed, the latest 6 months bank statements and other relevant documents as proof of your income.
4. Your current debt repayment commitments (e.g. personal financing from a co-operative society, instalment plans with merchants, etc.).
5. Information about your other assets such fixed deposits and investment in unit trust.

What are my responsibilities?

• Provide adequate and accurate information in the application form. Disclosing inaccurate information may affect your risk profile causing the financial institution to impose a higher interest rate. The financial institution may even reject your application if you provide inaccurate information.
• Before signing, you are advised to read and understand the key terms of your housing loan agreement. Ask your lawyer to highlight critical terms that you should take note of and explain any terms that are unclear to you.
• Pay your monthly instalments by the due date to avoid being charged a late payment penalty.
• Try to pay down your housing loan if you have excess money in order to save on interest charges. Check with your financial institution if any fees apply for prepayment.

What are my rights?

• Your financial institution must provide you a housing loan statement at least once a year, detailing the payments made and the amount charged to your loan account.
• You will be notified 7 days in advance if the financial institution revises your monthly instalment amount due to a change in the interest rate.
• Your financial institution must inform you in advance (21 days) before changing any terms in your housing loan agreement, including fees and charges.
• If you are not satisfied in your dealings with the financial institution, you have the right to complain to your institution.

Do I need to buy insurance?

• Your financial institution must inform you of any requirement to purchase a Mortgage Reducing Term Assurance (MRTA) or Mortgage Reducing Term Takaful (MRTT) and fire insurance.
• MRTA/MRTT is an insurance policy that fully settles your outstanding housing loan with the financial institution upon your death.
• MRTA/MRTT policy ensures that your dependents will not lose the property in the event of your death. Your dependents are also free from the burden of repaying your housing loan.
• The protection cover of MRTA/MRTT reduces over time as the outstanding housing loan amount decreases.
• Your financial institution may offer to arrange MRTA/MRTT from its panel of insurers or takaful operators. You are free to purchase the policy from other insurers or takaful operators. However, your financial institution may include the premium as part of your housing loan if you purchase the MRTA/MRTT from its panel of insurers or takaful operators.

What if I fail to meet my repayment?

• If you have difficulty meeting your loan repayments, it is important that you contact the financial institution early to discuss repayment options. Your financial institution would explore viable options in assisting you to meet your repayments. You do not need to engage a third party agent to act on your behalf.
• If your financial institution contacts you via letter or phone, do not ignore this. It is important that you co-operate with your financial institution, if not, your financial institution may:
  1. Charge you a late payment penalty of 1% per annum on the amount in arrears causing your total outstanding loan to increase;
  2. Increase the interest rate causing your monthly instalments to be higher;
  3. Take legal action against you. Your financial institution may foreclose your property.  You have to pay for all the costs related to the foreclosure. If there is a shortfall after your property is sold, you are still responsible to pay the balance amount owing to the institution;
  4. Take bankruptcy action against you if you are unable to fully settle the shortfall amount after your property is auctioned off.
• Your financial institution must not foreclose your property unless all other reasonable attempts to resolve your repayment difficulty have failed, and they must give you reasonable notice before taking foreclosure action.
• You may seek the assistance of Agensi Kaunseling dan Pengurusan Kredit (AKPK). AKPK is an agency set up by Bank Negara Malaysia to provide services on credit counselling, financial education and debt restructuring for individuals. You may contact AKPK HQ at:
  

  Level 5 and 6,
  Menara Aras Raya (Formerly known as Menara Bumiputera Commerce),
  Jalan Raja Laut, 50350, Kuala Lumpur
  Tel    : 03-2616 7766
  Email     : enquiry@akpk.org.my
  Website : www.akpk.org.my

• Beware of third party agents who claim to be representatives of AKPK and promise to help you in restructuring your debts.
• You are advised to contact AKPK directly. The services of AKPK are provided free of charge.