Home Loans 101

Congratulations – you’ve started planning ahead and have made the important decision to buy your first piece of real estate! That’s the easy part. The multitude of tasks that need to be prepared and completed prior to actually purchasing your dream house, like attaining a home loan or mortgage, can be a headache for anyone let alone a first time buyer. This is why we’ve decided to simplify things for your convenience. This article explains the important things to consider when applying for a home loan and how you can estimate the amount that you’re able to borrow from banks.

Know Your Terminology

Buying property for the first time is like stepping into a new world and, as such, requires its own language. It’s important to familiarize yourself with the specific terms that you’ll undoubtedly encounter throughout this journey. NuProp provides a comprehensive glossary of any and all the technical jargon that you may come across. It’s recommended that you use this as a point of reference as you go about researching the property market.

What Do Banks Take into Consideration?

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When buying a house, you’ll probably need to take out a mortgage (a.k.a. housing loan) from a bank to help you out. The amount that a bank deems appropriate to lend differs from person to person. It’s usually influenced by the following factors: Property valuation, the client’s risk profile, Loan-to-Value (LTV) ratio/Margin of finance and debt servicing ratio (DSR).

– Property valuation is the appraisal of the value of real estate. The higher the market value, the more likely it is that the bank will approve a larger loan.

– A client’s risk profile calculates the threat a client might pose to the bank or what they could potentially cost the bank. It also outlines the level of risk that the bank is willing to take. A person who has a substantial amount of debt and who never pays their credit card bills on time, for example, has a high risk profile.  

– LTV Ratio/Margin of finance is perhaps one of the more important aspects that a bank factors in. For residential home loans, the norm is usually a 90% LTV ratio. And in Malaysia, such programs like the My First Home Scheme (Skim Rumah Pertamaku) exist and work in favour of those who are eligible to get their LTV ratio up to 100%.

– As the name suggests, the DSR serves to show what portion of a person’s income goes towards paying off debts, usually represented as a percentage of income. It is important to note that not all banks use the same method of calculating the DSR and so the final outcome could vary greatly from bank to bank. It’s always advisable to research each institution to find the best deal.

Examples

It’s a well-known rule of thumb: when trying to estimate how much a bank will lend you, make sure that the sum of all of your pre-existing debts and the instalments of your soon-to-be home loan don’t account for more than a third, or 70%, of your net monthly salary (net salary generally means gross salary minus tax, EPF contributions and SOCSO). Disregarding this general rule could result in being labeled as financially over-committed, increasing your risk profile.

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Choice of Bank is Everything

This sounds like a no-brainer but it’s super important that you choose your financial institution well. As mentioned previously, no two banks will offer the same type of loan or even use the same formulae for their various calculations. Familiarize yourself with the housing loan packages offered on the market to ensure that you’re aware of all the fees and charges involved, and that you know the terms and conditions of the loan. Many banks offer a variety of different payment schemes — some more flexible than others.

Aside from these technical aspects of choosing a bank, there are other factors to consider. Since most loan tenures span decades (20-35 years on average), you’ll want to make sure that you choose an institution that you’re prepared to deal with for that long. Consider the institution’s reputation. Are they professional, reliable, efficient, transparent?

Online Calculators to Try

The Internet is rife with tools to help first-time homebuyers make informed decisions about their future. Among all the loan calculators available to try, we suggest these two from HSBC and CIMB, two trusted banks in Malaysia.

Now that you have the knowledge necessary to determine the amount that you should be able to get for your mortgage, it should make the search for your dream home that much closer to coming true. Visit NuProp.my and start your journey to home ownership today. Don’t forget to follow our Facebook page for more tips and advice on buying a property.

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