Borrowing In Today’s Market

Buying or investing a property in today’s market are more challenging as compared with couple of years back. The tightening lending policy introduced by Bank Negara more than a year ago has taken effect and we can see a drop in loan applications and approvals since November 2011.

The two most drastic steps Bank Negara put in place are the 70% margin of finance for third property purchased and above and also using net income instead of gross income to calculate the loan approval.

Banks still would like to lend out money but they are becoming more cautious and prudent in lending. The Banks still have to keep a balance between their deposits and loans to maintain a healthy account.

Before the Banks approve any loan application, they will look into a few aspects to gauge the repayment capability and financial standing of the borrowers.

Currently, bank uses Credit Tip Of System (CTOS) and Central Credit Reference Information System (CCRIS) to check on the credit standing of the borrowers before approving the loans. The former database is managed by a private company and the latter by Bank Negara.

CTOS collects data from public sources and it will show whether a person is in the process of being sued or bankrupt. Once a person’s name is blacklisted under CTOS it will be in the database system forever and cannot be erased.

CCRIS houses all the credit data of a person which includes housing, commercial loans, credit card, personal and government loans. If a person were to default in the repayment of any of the facilities it will be reflected in the CCRIS report. If the report shows 1 means the there is a late payment of 1 month, 2means 2 months and so forth. Any loans or credit cards application whether approved or rejected will also be reflected in the credit report.

Another yardstick that banks uses to check on the repayment capability of a person is through the calculation of Debt to Income Ratio (DTI) or also known as Debt Service Ratio (DSR) by most banks. DTI indicates how much of the borrowers income goes towards debt payments.

For example if your income is RM 2,000 and your total monthly debt payment is RM1,000 the calculation goes like this:

RM1,000 (Debt) X 100 / RM2,000 (Income) = 50%

Different banks uses different DTI ratio to determine whether they will approve the loan. Most banks use an average of 50% to 70%. If a borrower’s DTI falls below that percentage, the loan will be approved on a case to case basis borrowers can still appeal for the approval if it falls above the category. What’s included in income and debt varies from bank to bank. Borrowers are advised to do their own research before submitting their documents to the bank.

During my 15 years in this industry, I found that many borrowers are ignorance of how banks determined loan approval. I have seen borrowers panic when a bank rejects his/her loan and then they will submit their documents to multiple banks together. It will make matters worse. The smart way to go is to understand the current situation and then only submit the loans to other banks for approval.

I hope that, the above will give you a little more insight on how banks determine the credit approval.