Inovatif

Category: How-Tos

  • A Guide on Applying for A Housing Loan in Malaysia

    A Guide on Applying for A Housing Loan in Malaysia

    “Your loan application has been rejected.” If you had this said to you when you applied for a housing loan in Malaysia, then read on.

    Getting this response to your mortgage loan may be daunting and make you feel like a lost cause but don’t give up hope! There are several ways to navigate the murky waters of mortgage loan application – here are some points to look into to maximise your odds of obtaining approval for future mortgage loan applications:

    1. Check Your Debt Service Ratio

    This is one of the preliminary checks for financial institutions, with your debt service ratio (DSR) used to determine whether you’re able to afford the loan repayments. If the DSR is within their threshold given a range of income, it passes one stage of the mortgage loan application.

    The formula to calculate DSR is:

    DSR = Total monthly liability commitments / total monthly nett income

    Monthly Net income = Gross Income – Total Deductions (EPF, SOCSO, tax etc)

    Monthly Commitments = new loan application amount + car loan + personal loan + credit cards + mortgage loan

    Once the DSR has been determined, each bank will have their respective guidelines for the maximum allowable DSR threshold given a range of incomes.

    It’s typically determined by income level, but it may also be affected by your net worth and even things as arbitrary as educational background, age and nature of employment and sector.

    For example, some banks may recognise 100% of investment property rental income, and some may only consider 50% of the rental income.

    The calculation may differ also when it comes to variable income earners and the nature of the job. For instance some banks may take 80% of the six-month average income of an insurance agent, while others may take only 60%.

    2. Get Your Documents in Order

    Banks always look for a clear and complete set of documents for assessment. For any bank to process any mortgage or loan application, they require supporting documents including proof to validate your income sources and employment.

    For a salaried employee, the banks would like to see that you contribute to EPF and your income taxes via your payslips and tax submissions.

    For variable income earners, do keep a record of at least six months’ worth of income/payout statements and supporting transactions into your bank account(s).

    For the self-employed or business owners, ensure that your business documentation and accounting of bank balances are up to date as this will assist the loan officer to get any loans approved. In most cases, the bank would like to see a business with at least two to three years of operations supported by audited profit and loss and bank statement transactions to evaluate the ability to service the loan.

    3. Don’t Apply for Loans Immediately

    If you are a fresh graduate looking to submit a bank loan application, don’t apply immediately for a mortgage or credit facility once you receive your first payslip.

    While it may be tempting to get on the credit ladder, banks typically want to see a minimum of three to six months of permanent employment supported by your salary payslip, along with EPF and tax deductions (if applicable). 

    In the case of the self-employed or commission earners, banks look for stability in income and usually need to see a minimum of six months of payments to be certain that you can service the loan.

    4. Don’t Go Bankrupt!

    It goes without saying but if you are declared bankrupt, you won’t be able to secure any loans or credit facilities with any financial institution. Your status of bankruptcy can be obtained by checking the Malaysian Department of Insolvency (MDI) or searching on CTOS.

    5. Issuing Bad Cheques

    If cheques that you issue bounce back three times, this is a huge red flag. A bad cheque is commonly referred to as a bounced cheque, and refers to a cheque issued by an account holder, dishonoured and returned by the drawee bank when it is issued from an account with insufficient balances or a blacklisted account under the Credit Bureau by Bank Negara Malaysia. 

    Banks usually view this as a precautionary signal and will reject the mortgage loan application and other pending loan applications.

    6. Maintain a Good Credit Score

    Maintaining a good record and positive status in CCRIS and CTOS is essential. Banks use CCRIS and CTOS as a reference to evaluate credit pattern behaviours and adverse reporting that will illustrate credit payment ability and servicing financial commitments.

    The Central Credit Reference Information System (CCRIS) is a system created by Bank Negara Malaysia that maintains the repayment track record for the last 12 months of all credit facilities of participating financial institutions in Malaysia.

    Any late payment or prolonged late payments of over six months will be flagged as a “Special Attention “ account in CCRIS. This indicates a red flag for banks.

    CTOS is a privately-owned credit reporting agency that provides credit reporting and also has access to information such as bankruptcy, legal action and case statuses, individual’s business ownerships, shareholding and directorships.

    They can also retrieve information from utility and telecommunication companies if you have outstanding bills (even if it’s only RM50!) and which can be a cause for banks to reject your loan application!

    7. Ensure your Quantitative Elements are Solid

    In this day and age, every bank has its own algorithm and software to calculate an individual’s score. This can be a subjective matter as software calculates the scoring according to quantitative and qualitative elements, which may not be the same as the algorithm and systems used by other banks.

    The quantitative elements include DSR calculation, the net worth of an individual or profit and loss of a company and also refers to CCRIS records. Qualitative elements include factors such as age and educational background.

    Your score will differ across each bank as they use different algorithms and systems. As a mortgage loan applicant, you can improve your profile by ensuring the quantitative aspects are covered and within their requirements.

    8. Not Having Any Credit History

    A poor credit score is not the only reason lenders reject mortgage loan applications. Having no credit history makes banks uncertain of your ability to pay.

    It’s advisable to build up a clean credit history, and it’s normally best to start this by applying for a credit card application or taking up a small loan. 

    With a smaller credit card facility or loan (that is consistently paid!), this may create a higher approval rate for your mortgage loan in the future because the perceived chances of defaulting on payment are lower.

    9. Late Payment of Instalments

    A poor track record of loan repayments gives a bad impression to potential lenders and might impact your future application. So try your best not to be late and settle your credit card bills, car loan instalments and other commitments on time.

    One way to do this is to set a payment reminder on your calendar or other forms of reminders on your mobile devices.

    10. Bank Risk Appetite

    Lastly, it is important to note that all banks have different risk appetites. There are instances where a bank has their own non-preferred segments; this could include people working in a niche industry, not meeting the minimum age, or not having a strong educational background requirement.

    You may get rejected for holding too many credit cards and you may also get rejected for not holding any credit card. In addition, a rejection could also be due to the mortgage financing not being within their particular area, developer, property type or market segment.

    Treat applying for any mortgage or loan like you’re going for a job interview. With a little financial planning help in money management, preparation of supporting documents and maintaining a clean profile in CCRIS and CTOS you stand a better chance of getting your mortgage loan approved by the right bank.

    About the Author

    Rozanna Rashid is a Licensed Financial Planner (CFP, IFP) that has an MSc in Real Estate Economics & Finance from the London School of Economics & Political Science. Her background is in corporate banking and Islamic finance and she can be contacted at rozanna@alpine-advisory.com

  • The Importance of Financial Planning

    The Importance of Financial Planning

    Have you ever thought about what would happen if Malaysia’s government re-implements the Movement Control Order (MCO)? With the upward trend of Covid-19 cases in Malaysia, this is a big possibility.

    Be honest for a second – are you well-prepared for the next MCO? Many seasoned working adults in Malaysia are struggling to manage their cash flow, let alone fresh graduates or youths.

    This highlights the importance of financial planning and being financially literate from an early age.

    A survey conducted by AKPK in 2019 shows that only 24% of Malaysians are able to survive on their savings for up to three months, while just 10% are able to sustain for six months or more!

    Are you among the 76% of Malaysians who won’t be able to cover expenses for more than three months? If so, what can you do to improve your cash flow?

    Differentiate between “needs” and “wants”

    Many Malaysians lack financial knowledge in general, especially in the area of financial planning. A study conducted by the Financial Education Network (FEN) showed that Malaysians are not confident about their own financial knowledge.

    Although 76% have set a personal budget, two out of five people were unable to stick to it. 

    In addition, one in every five Malaysian working adults couldn’t save any income in the last six months, while three in every 10 needed to borrow money to buy essential goods.

    In other words, these people had to rely on credit cards, government incentives or even loans just to buy food!

    To restructure your personal finances, you must learn how to differentiate between ‘needs’ and ‘wants’. For example, food, rent, petrol and insurance fall under needs.

    Conversely coffee, streaming services, the latest smartphones, and other luxury goods are not necessary to survive. If you are spending more on wants than needs, you should consider reviewing your cash flow and potentially cut down on luxury expenses.

    You could explore carpooling or taking public transport, or cooking at home to reduce spending on dining outside.

    Make saving a habit

    The rising cost of living in Malaysia, especially in cities, has forced many young working adults to become more frugal.

    Even with extra jobs, many are still unable to allocate any earnings to their savings, with a 2017 Bank Negara Malaysia survey revealing that 75% of the Malaysians are unable to raise RM1,000 in emergencies. 

    Due to poor saving habits, many youngsters rely heavily on credit cards to finance their needs and wants. As a result, they may fall deeper and deeper into credit card debt. When they fail to settle their balance, it becomes a debt that carries forward to the next month’s bill with compounded daily interest. In simple terms, they’re spending their future income in order to support their lifestyle.

    When planning your personal finances, I strongly encourage you to set a budget and always keep track of your expenses, and avoid using a credit card if possible. Below is a rough allocation budget I would recommend:

    30% Savings and investment
    50% Necessities
    10% Commitments
    10% Insurance and protection
    100% Total take home income

    It is advisable to allocate at least 10% to 30% of your income to savings and investments. These savings serve as emergency funds for you to cover the cost of getting sick, accidents and more.

    You should also look into exploring small investments that can help to grow their wealth. I highly recommend that you save or invest before spending so that you won’t spend all your income. 

    Do also allocate at least 10% of your income for commitments such as PTPTN loans to reduce the principal and compounded interest. Another 10% should be allocated for protection, as you are human and unable to foresee unfortunate incidents in your future.

    By purchasing insurance, this offers peace of mind and a reduction of your financial burden during times of sicknesses or unfortunate events.

    If it’s too good to be true, it probably is!

    High-return investments always sound good on paper, which is why it continues to attract many people, young and old alike. However, if you aren’t able to self-engage in comprehensive and thorough financial planning, you may lack a clear understanding of financial risks and returns.

    This makes you prone to errors of judgment, which leads to high-risk or unwise financial decisions. 

    It’s very easy to fall into investment traps and suffer huge losses. Many are also jumping into the deep end of trading in forex and bitcoin, or worse still – pyramid schemes and other scams.

    Without proper financial planning or knowledge and understanding, it’s easy to be misled by shiny numbers and figures without considering the risk or feasibility of such schemes.

    Don’t be susceptible to financial traps and irrational financial decisions – read and learn everything you can about investing before jumping in to avoid becoming another statistic.

    In a nutshell, it’s incredibly important for you to learn how to manage your cash flow and have your own simplified financial plan.

    By better understanding your cash flow analysis, you can re-allocate your income wisely.

    Always remember to save before you spend and understand the financial risks and returns before investing into anything. Be sure to avoid investing in platforms or schemes that aren’t legally recognised by the Securities Commission Malaysia. 

    Finally, remember that it’s never too early to start your financial planning journey!

    About the Author

    Edmond Tang Zhen Han is a certified financial planner that is passionate about helping people achieve financial literacy in order for them to reach financial freedom. He can be contacted at edmondtangzh@genexus.com.my

  • Financial Planning for Fresh Graduates

    Financial Planning for Fresh Graduates

    Congratulations on your recent graduation! You are now entering into another exciting stage in life as a fresh graduate and are ready to start building wealth. This is just like building your dream house. Let’s start with financial planning for fresh graduates.

    You have to start building a strong foundation, so that your wealth is solid and stable. Here are three steps you can take to start your journey:

    1. Change Your Money Management Mindset

    Wealth accumulation is all about having the right mindset in terms of money management. Let’s start by accessing your way of handling money.

    Equation 1

    • Income – Saving = Expenses  

    Equation 2

    • Income – Expenses = Saving

    Which equation do you apply in your life? Your answer will reveal where your PRIORITY lies in managing money. In equation 1, you prioritise SAVING before spending. In equation 2, you prioritise SPENDING before saving. Eventually, you might end up saving nothing.

    For you to accumulate wealth, you have to pay yourself first every time you receive an income. It’s recommended to start saving (and investing) at least 10% of your income, and then gradually increase this percentage to 30% and beyond as your income continues to grow.

    The secret to wealth accumulation is all about spending below your means, saving and investing your money, and to continue repeating this with every pay raise you get!

    However, why are people prone to spend first instead of saving money? We are living in a digital era where our decisions and behaviour are easily manipulated via social media marketing, without us even realising it.

    I bet you can relate to the following scenarios:

    • When the latest technology gadget is launched, you are magnetised to purchase it to keep up with the trend
    • After viewing your friend’s Instagram story, you might make an impulsive decision to book a flight ticket for vacation
    • You are spending, dressing, behaving in certain ways to impress others

    The above scenarios are examples of social validation. We’re social animals and will do whatever it takes to belong to a social group. Therefore, you are likely to spend your hard-earned money just to keep up with trends and stay updated among your peers.

    Realising your worth is more than your social appearance can help in breaking social validation patterns. Sit down and think about who you really are and what defines you. Once you’ve cleared this up, you’ll start to make better decisions for your financial and mental health.

    2. Build An Emergency Fund

    Emergency funds are a financial safety net for unexpected events like losing your job. Not having a financial cushion might lead you into bad debts such as personal loans and credit card defaults. The biggest enemy of wealth accumulation is bad debt, because it is impossible for you to accumulate wealth while serving high interest bad debt.

    According to the RinggitPlus Malaysian Financial Literacy Survey (RMFLS 2020), 53% of Malaysians would not be able to survive for more than three months with their current savings. What will happen to them after exhausting their savings?

    The Covid-19 pandemic has put the importance of emergency funds firmly in the spotlight, so it’s important that you build up your own in order to survive unexpected events. But how big of an emergency fund do you need?

    If you are single with no dependents, aim to prepare an emergency fund with at least six months of monthly expenses. For example, if your monthly expenses (loans, food and beverages, transportation, accommodation, insurance, etc) is RM3,000, you should have at least RM18,000 on hand at all times.

    If you have dependents like your parents, spouse, or kids, prepare an emergency fund that can cover at least 12 months of expenses. Let’s say your loans and living costs total RM5,000 each month – this means you should have RM60,000 available in case of emergencies.

    3. Risk Management

    Life does not come with guarantees. The Covid-19 pandemic has shown us that anyone is vulnerable. Accidents can happen. Health issues may arise due to lifestyle choices, stress, and family history. When something unexpected happens, the last thing you want to worry about is money.

    In order to protect and grow your wealth, you need to mitigate your risks. Generally, there are a few types of insurance that’s advisable to have, depending on your situation. 

    Types of Insurance Purpose
    Medical Insurance Pays for your medical bills
    Critical Illness Insurance Lump sum money payable to you upon diagnosis of critical illness.
    Acts as income replacement
    Life Insurance Lump sum money payable to your beneficiaries upon death. 
    This is especially for those with dependent (parents, spouse, kids)
    Disability Insurance Lump sum money payable to you upon disability.
    Acts as income replacement

    By following the three steps above, you’re well on your way to building the right foundation in wealth accumulation. Once your foundation is solid, the next step is to understand and set your wealth accumulation goals like house purchase or retirement, as well choosing the right strategies and solutions to achieve your goals. However, Rome was not built in a day; be patient and take your wealth accumulation journey one step at a time!

    About the Author

    Kuah Soo Yee is a Licensed Financial Planner (CFP) who is passionate about helping people make sound financial decisions and achieve their financial goals. She can be contacted at soo.yee@ipp.com.my