Some Tips on Banks Approval Criteria

Many of us knew but not all the criteria of bank approval for mortgage loan. Video Linked below is a sharing session at MCT Land Sdn Bhd for their purchasers about loan application and approval criteria.

Some of the Highlights:

  1. What are the point to consider for property selection?
  2. What income could be considered?
  3. What are the effect of extra RM 300 income per month to the margin of finance?
  4. How do banks find out about our repayment habit?
  5. What is the challenge faced by a fresh graduates?
  6. How does 70% ruling affect our loan eligibility?

Feel free to contact us for further clarifications. Follow us on Facebook : http://www.facebook.com/EthanETTeh or email us at ask@ethanteh.com.

If you are a property agency, developer, investment group, residence associations & etc, feel free to contact us for workshop/seminars/clinics for the following topics:

  1. How to know my Mortgage Loan Eligibility?
  2. How to Leverage Banks on Property purchasing/ investment?
  3. How to save interest on existing mortgage loan?
  4. How to choose a Mortgage Loan that suits me?
  5. What is Mortgage Loan Protection option? MRTA/MLTA?
  6. How can I plan for my wealth distribution?

Video : https://youtu.be/BXJRxocrPvQ

 

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I’m sorry, But MRTA does not necessary protects your mortagage loan!

* This post was written based on discussion from a ex-mortgage sales person from banks.

MRTA Does Not Necessary Protects Your Mortgage Loan!

Most of the Property Owners believe that their mortgage loan was protected by Mortgage Reducing Term Assurance (MRTA or MRTT for Takaful), but this is not the fact! It is a real life situation that many loan borrowers not knowing their loan is not well protected.  In some of the situation, the protection expired within first few years while some with coverage less than half or a quarter of their loan amount.

MRTA

WHY MRTA?

What is the reason a mortgage sales propose MRTA?

First of all, it determines a mortgage sales person incentive and key performance index (KPI). Most of the time, banks will either through collaboration with their sister company or any other insurance company to provide MRTA to their borrower. Whichever the business partner may be, it will generate some revenue for the bank. Therefore, banks will want their mortgage sales to bundle the product to their customers. In order to ensure the cross selling, many banks actually impose minimum requirement to their sales person in order to get higher incentive or to meet their KPI.

Further to that, MRTAs bundled by bank are normally financed into the mortgage loan; but, there are guideline by banks that total Loan to Value ratio of a property should not be more than 90% (property) + 5% (Legal Fees, Valuation, Stamp Duty & MRTA). To avoid complication, mortgage sales will bundle the amount allowable for financing. Hence, the consideration is amount of premium that could be financed rather than amount of protection that the client need.

Lastly, due to the current competitive environment, every bank is offering different lending rate for mortgage loan and this is one of the biggest consideration of client when choosing a loan offer. Normally, bank will allow for rate appeal if client is taking certain amount of MRTA. Without properly advising client, mortgage sales will eventually bundle in a minimum amount to ensure the lending rate provided is competitive.

Therefore, MRTAs were often being offered without proper advice to clients.

MRTA’s FACTs MISUNDERSTOOD

What are the most common misunderstood facts about MRTA?

My loan is covered with MRTA (100% loan amount and full tenure year), therefore I’m sure that my loan is very well taken care of if any unfortunate event happens to me. This is true if the plan was properly planned, the interest rate expected during purchase of MRTA is valid or higher than the actual effective lending rate. For example, a 1% increase in lending rate would have increase your instalment by 10% in some case, or the loan will be prolonged by almost 10 years. Hence, the MRTA purchased earlier may not be sufficient to cover the outstanding loan amount.

I’ve bought MRTA for 10 years, therefore for the first 10 years if anything happened to me, my loan is well taken care of. This is one of the most misunderstood fact about MRTA. By refering to the chart below, this is an example of a loan with 24 years tenure, loan amount of RM 875,000-00. Black represent outstanding loan amout, Blue represent the expected protection for the first 10 years. Red represent the actual protection for the first 10 years.

MRTA - Chart

* Mortgage Reducing Term Assurance (MRTA) is one of the tool for loan protection. However, the highlight of this discussion is most of the time a borrower was not properly advised on how MRTA worked and what was provided. Hope this could help to create awareness among mortgage loan borrowers.

Feel free to contact us at: ask@ethanteh.com

Read full text here : About MRTA – Nov 2015 (PDF)

Hope this could create awareness among mortgage loan borrowers.

2 Financial Quick Rules

The first rule to be discussed is related to mortgage loan. After practising and repeatedly making calculation for mortgage loan upon enquiry, I observed that anyone could quickly make a simple calculation base on this rule. A mortgage loan with tenure of 35 years (max) and effective interest of around 5%, the monthly instalment will be about 0.5% of the loan amount. Example, if you are about to get a loan of RM 500,000, the monthly instalment is about Rm2,500 per month. Not too sure if there’s any name for this, for easy of reference, I would like to call it as Rule of 1/200 (equivalent to 0.5%).

How can anyone do a quick check using this rule?

  • Decide on affordability of repayment prior to purchase of property. Simply divide the loan amount by 200 and that will be your monthly repayment amount. Decide whether you are comfortable with the repayment amount or not.
  • Prior to looking for a property, decide how much monthly repayment you are willing to pay. For example, if you decided to pay RM 2,000, multiply it by 200, and you will end up with RM 400,000. Since maximum loan margin for residential is 90%, you could look for a property around RM 450,000.

The Second Rule – Rule of 72. Many write up available for this Rule of 72, but many seems to have not really look into this quick reference. For me, most of the time, this will be used for estimating the viability of a investment. What does this mean?

Divide 72 with the return rate offered, that would easily estimate the time for your initial investment is doubled. I would like to use one of the simplest example, Fixed Deposit Saving. If you save RM 100,000 in a FD account with 3.6% interest rate, with the interest received added back into principal, your saving will be RM 200,000 in approximately 20 years. We get the answer 20 by dividing 72 with 3.6.

You can also use this to estimate your rate of return for investment. Example, my investment doubled in 10 years, therefore my rate of return will be approximately 7.2%.

2 simple rules for quick check. Perhaps with advancement of electronic devices, many will not find these rules helpful, I still like it the old way for quick check.

Mortgage Loan: Bi-Weekly Payment REALLY Save Your Money?

One of the hot topic last month concerning a lot of mortgage loan borrower when there was an article (by other) circulated describing how two (2) simple move could save you a lot of interest. As usual, approached by colleagues, friends, relatives, Facebook friends & etc. “How could this possible?”, “Is this true?”. As I’ve verbally explained to some and this article was meant for all. Sorry for the delay.

BiWeekly

It depends! If you are changing to Bi-Weekly mode if there’s this option (with Malaysia’s Bank), and you are making the payment according to the instalment calculated based on bi-weekly payment, you saved “peanuts”.

In order for what mentioned in the previous article to work, you need to do as what the article suggested, you pay Bi-Weekly by dividing your monthly instalment into half and pay every 2 weeks. This sounds true as one month consists of 4 weeks, but one year consist of 52 weeks which will be equivalent to 13 months. Logically this will definitely shorten your loan in term of years as you make extra payment each year. After 12 years, you have made payment for a year extra. As describe in my just previous post, understand the meaning of Daily Rest, each early or extra payment you make will definitely save you interest.

Link to my previous post : https://ethanetteh.wordpress.com/2015/05/07/understand-your-mortgage-loan-save-thousands-of-ringgit/

Secondly, you should do the bi-weekly payment correctly. If your instalment due in 1st of July and the instalment amount is RM 1,500.00, Please do not divide the instalment into half and make the payment on RM 750.00 with the balance being paid on 15th of July. If you are doing this, not only Bi-Weekly won’t save you interest but will in fact increase the amount of interest you are paying. The article actually requested you to pay your RM 750 on 15th of June.

For me, just take note of three important points here. First, most of us make instalment every month because the income basically also coming in every month, be it salary or even rental. It makes more sense to manage your instalment that way as well.

Secondly, I agree with the extra payment made each instalment in order to save on interest as this really works. (kindly refer to example in the previous post).

Thirdly, kindly utilise the Flexi-Loan and Semi-Flexi Loan account that you have applied for. Many insisted on Full Flexi-Loan but later to be found out never utilising it but paying the monthly maintenance fee. Whatever extra money placed in this Flexi-Loan account has indeed assisted to save on interest.

Any doubts? Email to ask@ethanteh.com

We have a working MS Excel Spreadsheet that could simulate effect of extra payment. Kindly drop me email if you are interested.

For convenience of all, MS Excel file is attached. : Amortization Complete Worksheet V2

Understand YOUR Mortgage Loan & Save thousands of Ringgit !

During 3 years in my financial services industry, one of our major business is in Mortgage/Property loan, one of the important information that we will tell our customer is how the Mortgage Loan repayment schedule work and how is interest being calculated by Bank. 2015-05 Amortization Recently my newly joined colleague came to me again regarding a “Advanced Software” that was sold for few thousands Ringgit to help Borrower save their interests. An argument also roused by National House Buyer Association recently regarding interest calculation of Mortgage Loan. I determined to pass this information to as many as possible. Why should we let Bank earn more and why should we let some to take advantage on the lack of information passed to mortgage loan borrower? Two (2) important concept we need to understand about Mortgage Loan in Malaysia:

  1. Daily Rest

Daily Rest means Interest is calculated daily – a term that sounds simple but how many of us really think seriously about this? It basically means that if you pay your monthly instalment 1 day earlier, will save you 1 day interest of the principal amount. If your loan was RM 500,000-00 at 4.65% a year 1 day interest = 4.65/100 x 500,000-00 x 1/365 = RM 63.70/day. Therefore, if someone show you if you pay one week earlier each month, you will save on your interest, it’s extremely true. But why do you need to pay to being told to do this?

2.  Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

Quoted from below: Read more: http://www.investopedia.com/terms/a/amortization.asp#ixzz3ZQrVOZOu Follow us: @Investopedia on Twitter

Hence, any extra payment made each instalment will definitely save you interest in long run as more will be paid to principal and will immediately reduce your interest on the next business day.

I’ve done a simple example to explain on how significant extra payment can save you thousands of Ringgit on your mortgage loan.

Scenario: If X is having a mortgage loan of RM 500,000.00 and the repayment period of 30 years. The packaged offered was BR + 0.65% with BR at 4%. We assumed that BR maintained at 4% through out the loan tenure of 30 years. Summary TableYou would have observed that there’s a Extra Payment Box where RM 100 was added every month

Extra Payment

We can observe that, we will save RM 38,083.42 and shorten our loan by 2.3 years. Many might doubt about this, but it is really as simple as this. The more you pay extra, the larger the amount you can save.

Feel free to contact us at : ask@ethanteh.com

How Does GST affect Property Purchasing Process?

No hotter topic than GST at this moment with less that 48 hours to go. It’s challenging and when google search  research was done on the web for few days, found that many discussed the impact and possible effects of GST on the property market. What we would like to discuss will be the direct impact on every steps on the Property Transaction process.

GSTProperty

Kindly refer back to the earlier discussion for the process of purchasing a property : https://ethanetteh.wordpress.com/2015/01/29/what-should-i-do-next-buying-a-property/

  1. Placement of Booking
    1. No GST to be charged at this stage as no actual transaction taken place yet at this moment.
  2. Application of Mortgage Loan
    1. If there’s payment of processing fee to be made, the processing fee is subjected to GST, but at this moment no processing fee is charged and therefore no GST involved.
  3. Acceptance of Loan
    1. At this stage, most of the time, no charges involved unless the set-up fee charged by bank for Flexible Loan (Typical amount: RM 200), this Set-up fee is a service charged by Bank and therefore is subjected to GST. Subsequently the monthly maintenance charge (Typical amount: RM10) or redraw charge (Typical amount : RM 10 to RM 50) are also subjected to GST.
    2. Besides that, mortgage protection plan, MRTA or MLTA also signed at this stage and since both are life insurance, no GST should be charged unless Critical illness or others riders included.
  4. Valuation Report
    1. Valuation report is required only for Sub-Sale of completed property. The valuer needed to provide a valuation report for the Open Market Value of the property to bank and the valuation fees will be subjected to GST.
  5. Signing of Sales & Purchase Agreement (SPA)
    1. Up to this part, all the above involve both Residential (GST Exempted) and Commercial Properties. For the discussion below, only commercial properties which are subjected to GST apply unless otherwise stated.
    2. During signing of SPA, purchaser will pay the down payment of 10% and this is part of the transaction, therefore, the down payment is subjected to GST.
    3. The Legal Fees for SPA documentation and Loan Documentation are also subjected to GST, but this is merely to replace Gov Tax charged earlier which is also 6%. The Memorandum of Transfer (M.O.T) and Stamp Duty payable to land office will be excluded for GST.
  6. Commission to Real Estate Agent
    1. Commission payable to Real Estate Agent is subjected to GST. For the common practice in the market, the booking fee paid by potential purchaser is normally treated as commission to Real Estate Agent, this will cause some complication as Seller will need to pay GST for the amount of Commission or brokerage fees paid to Real Estate Agent. (Regardless Commercial / Residential Property because this is payment of commission to brokerage agent) (for more details: http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/Guide%20on%20VALUERS%20APPRAISERS%20and%20ESTATE%20AGENTS%2031102014.pdf} )
  7. Interim/Full Payment to Seller
    1. Either under construction or completed property, for ease of discussion, every time a payment is done to the seller, the purchaser will have to pay GST. i.e. in the event of completed property, when Bank pay the balance sum to seller, purchaser will have to pay the GST of that amount.
    2. In the event the property was under construction, the scenario is still the same, whenever Developer invoices for interim payment, the purchasers will have to pay the GST. This also apply to property which is currently under construction which has not been fully paid up even though the property was purchased 2 years ago.
    3. Example. Mr K purchase an office unit in year 2014 and is 60% completed. The next stage billing comes in the month of May 2015 (10% of the purchase price), bank will release the 10% as the loan was offered earlier but Mr K need to pay the GST for that 10%. With this, Mr K actually need to prepare additional 6% for the remaining 40% which is additional 2.4% of the initial purchase price. At the moment when this article was written, no banks is financing GST.
    4. For more details, refer to Guideline from Royal Malaysian Custom Dept. : http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/Revised/Guide%20on%20Property%20Developer%20%20updated%20draft%20as%20at%2011%20Mac%202014%20-%20amended%20_1.pdf

Residential property was listed under Exempted Item for GST which is different from Zero Rated Item. For Exempted item, input tax could not be claimed, hence, it will be transferred to end-user even the final price is not subjected to GST. Item 5 & 7 discussed above do not apply to residential property.

*For reference and discussion only. Discussion was made with understanding of author on the material available. Kindly email to ask@ethanteh.com for further discussion.

4D Betting – Betting for Wealth? Greed or Hope?

Since holiday is coming and let the discussion diverted slightly from serious topic. What prompted me to discuss about this was the phenomenon observed on draw dates for 4D betting in Malaysia. Normally these area will be slightly congested especially during few hours before bet closing time on draw dates. Some of the hawkers will also set up their stall near to these shops on draw date.

4D betting in Malaysia take place around 3-4 times a week.

4D Logo

What is the reason for these customers to place their bet? Is it due to Greed? Everyone would like to get rich without having to work? Do we really think that the desire to become richer is Greed? Or is it because the method to become richer by placing a bet is considering greedy because the amount of effort placed is less?

Would it be HOPE? Would it be they are actually buying a HOPE. By placing a bet of RM 1, one is hoping that he/she could win RM 50 ~ RM 2,000. Multiply the amount by 10 or even 100, that person still could not be rich enough to stop working. It is just a hope of winning some to lessen their burden for a period of time or loosen their financial stress for a period of time. How often we heard of a story that one become wealthy enough to stop working and enjoy a life after winning a 4D bet. But still the story of a single person could inspire thousands, ten thousands or even hundred thousands of others who have not win any for their whole life to continue to pay for the HOPE.

A lot of people are willingly squeeze the budget to buy a hope. How high is that hope actually? Statistically, the winning of 1st prize is 1:10000 and by betting the correct 4D, one win about RM 2,500. Statistically in order to win RM 20,000, one will have to bet RM 8 for each betting date at 3 different operators in Peninsular Malaysia which sum up to RM 24 for a chance of 0.01%. Multiply by 3 draws and 4 weeks a month, it will sum up to RM 288 a month.

Now, let’s face a reality of life. The probability of getting a cancer in Malaysia by age of 75 is 15%. Or we could calculate new cancer cases in year 2012 over 29.3 Millions of population in Malaysia, the probability stands at 0.13%. This is 13 times higher than the chance of hitting 4D. With the same budget, one can prepare an emergency fund of RM 1 Million per year and could include other financial threatening possibility. Further to that, most of the time, the money invested for this risk mitigation plan come with certain saving. (Statistic from : Malaysian Cancer Oranisations and Resources)

The purpose for this post was not intended neither to against anyone/anything nor promoting betting.

*This post was started before Chinese New Year season, but wasn’t completed until today. Since it’s completed now, just for reading pleasure. Next discussion will be on GST on property.