Improving Your Borrowing Power

What you should and should not be doing

Although there are numerous reports that home buyers are facing a tough time in getting their housing loans approved with the current economic outlook, securing loans are still very much possible although the journey may be rough and tricky. The number of transactions has taken a dip, no doubt, but the market is not facing a fatal crash.

Bank Negara Malaysia (BNM) keeps a computerised database of credit reports which contains credit scores of individuals. This database system is known as the Central Credit Reference Information System or CCRIS. The CCRIS receives credit dates from various financial institutions (FIs) and generates individual credit reports, which are made available to financial institutions, individuals and even companies upon request.We may wonder how people are able to get around it but our borrowing power from the banks actually just depends on our credit report and Debt Servicing Ratio (DSR).

CCRIS contains your information on all outstanding credit, excluding accounts that have been fully settled. There is a special attention account, for the non-performing loans, loans that are in default or close to being in default. The tricky part is our applications for credit – which have been approved over the span of one year – are also recorded in the report and banks do take note of them.

CREDIT HISTORY

Financial institutions refer to your credit report to determine your repayment capabilities before approving a loan application – regardless of how good of a paymaster are you. However, before the bank accesses your credit report, it will inform you in writing that a credit check is to be conducted.

Once the application has been approved, the bank will send information to the Credit Bureau on how well we have handled our debts. Banks make periodical reference to this credit report to get updates on existing borrowers.

The information stored in CCRIS also includes any new loan applications. Hence, it is safe to say that your banks are fully aware of how many FIs you have already approached prior to applying with them. This may not affect your credit rating, but may send a negative signal to some banks.

Licensed Financial Planner of VKA Wealth Planners Sdn Bhd, Kevin K.M. Neoh says financial institutions will look into the credibility of borrowers regardless of the types of loan they are applying. Based on his inputs, banks examine a borrower’s capabilities based on:

Credit History (Character) – It tells the FIs about your repayment behaviours

Cash flow (Capacity) – Stability of savings or other income source

Collateral – For a mortgage, the property will be charged to the banks so in event of default, banks can liquidate the asset to cover up for their losses.

The following factors may contribute towards a long review or rejections of loans.

Properties are located close to a landslide or flood prone area, oxidation pond or power station

Properties face high tension wires, major highways and T-junctions

Located near graveyard or any negative factors that would affect the value of the property.

Status of land such as native land, Malay Reserve Land, agriculture, industrial, forest reserve, land with restriction to transfer to non-Bumis or non-Malays or Bumi lots.

Lease duration for Leasehold Properties – FIs need to see a minimum of 30 years (for instance) of unexpired lease at maturity of loan so the property still has a value if it needs to be auctioned off.

Properties without title

Conditions – Duration and terms, repayment capabilities of the loan.

Apart from CCRIS, banks will also refer to the Credit Tip-Off System (CTOS) to check credit history and payment records and this table provides an overview of the two credit information system.

IMPROVING YOUR BORROWING POWER

Borrower’s DSR and risk profile are weighted more heavily compared to their property valuation and maximum LTV that’s available to them.  An individual’s DSR shows a bank his financial ability to pay his debts and calculates how much of a person’s income is used to pay all debt instalments, represented in %:

High debt repayments in comparison to your nett income, will result in a higher DSR – this implies to the bank that you may be borrowing beyond what you can afford and are at high risk of defaulting on your loan. A healthy DSR rate is around 30% of your nett income. However, banks do allow on average between 70-80% DSR.

To lower DSR, borrowers need to reduce their total debt or increase their nett income. On top of having a low DSR, banks will also scrutinise your credit history to assess your risk profile and do a background check on your past and existing debt repayments.

So it becomes extremely important for borrowers to maintain a good credit history – meaning they need to have a good record of managing their debts and expenses including things like PTPTN loans, credit cards and other personal bills

In other words, poor credit ratings are not necessarily because borrowers have insufficient cash but rather because their loans were taken unnecessarily.

“You are using your future money, therefore, when you receive the money in future, you have to pay back to what we have ‘advanced’ today. We may not be aware of how much we have advanced and when they are suddenly stacked up, it may be difficult to service these borrowings,” says Neoh adding that this is when people start having misses in their CCRIS.

It does not make sense for borrowers to try hard and maintain their savings when they have outstanding payments to make although it is understandable that their actions are driven by the idea to feel ‘financially secured’ but when outstanding payments continue to accumulate or recur every month, the said ‘financial security’ doesn’t help in setting the credit records straight.

The idea of trying to scrape through with that minimal income doesn’t make the money in hand readily disposable and it is a common mistake that most people make without realising the depth of the debt hole they are actually digging.

Finance consultant and former banker Miichael Yeoh says the younger generation below are already being blacklisted and facing bankruptcy before they hit 30.

“You must remember that when you’ve used your credit card, you cannot simply pay the minimum. Let’s say if you’ve used RM10,000 and you only pay 5% (minimum), you have actually over-used your credit and have not serviced it accordingly so banks will wonder about your repayment skills,” says Yeoh

Apparently the profession you are in is also taken into consideration to learn the risks of lending. Banks, for example are cautious about the oil and gas industry as it remains vulnerable.

“If you get fired, how would you serve the loan and if you work in a factory with machines, that is actually considered a high risk business with occupational hazards. I had a former client who was making really good money but banks were continuously rejecting his applications because the nature of his job is dangerous,” says Yeoh adding that banks put such policies in place to avoid bigger problems like sub-prime issues that the US is currently facing.

He advises consumers to fully disclose all information on their financial positions when applying for loan. In conducting affordability assessments, commercial banks take into account the applicant’s income after statutory deductions, expenditure on necessities and all existing debt obligations from banks and other lenders. Self-employed applicants need to show proof of savings and regular income source.

PRIORITISING NEEDS

In order to improve our credit ratings and borrowing power, we should firstly start with our own financial management. While individuals have the liberty to decide how, what and where they would want to spend their money on, a little change and perhaps some amount of sacrifices can be made to control our spending habits.

Instead of spending on improving our lifestyle – based on whatever standards we deem fit – its crucial for us the Gen-Ys to have a long term goal and achieve them as early, in life, as possible. You will have set the priority – whether its buying a house for your own stay or even for investment purposes – but at the end, most people would just want to enjoy financial freedom, without worrying about answering calls for outstanding payment or putting in paper works for loans that matter.

As suggested by experts, the root cause of our loan application failures lies in our ignorance to recognise the need to manage our cash flows and our spending habits.

We are only seeking a restless life when we do not manage our credit reports and have more debts than what we can actually afford. Matters are made worse when we fail to become good paymasters. All we are doing is affecting our borrowing power further which prevents us from attaining our life goals and jeopardising a lot of crucial things – like career, relationships, social standing, responsibilities and self-actualisation – along the way.