Your credit score reflects your credit behaviour and your ability to repay to the lenders. Banks and other financial institutions go through your credit report to analyse your risk level and check if there were any payment defaults on your part. Let’s take a look at what would happen if you default on your home loan payment.
The Current Housing Loan Scenario in Malaysia
Bank Negara has implemented many stringent rules as far as housing loans are concerned. In 2015, there were approximately 25,000 Malaysians below 35 years of age who have become bankrupt in the previous five years. According to recent reports, the loan rejection rate is somewhere between 60% and 70%.
On the other hand, the central bank has also introduced many financing schemes, includingFirst House Deposit Financing Scheme/Skim Rumah Pertamaku (SRP) for first-time buyers and PR1MA or Perumahan Rakyat 1Malaysia for middle-income earners.
However, the situation today has gone from bad to worse. In spite of these schemes being available easily, many Malaysians find it difficult to find a property at a reasonable price. Moreover, there is a shortage of affordably-priced homes.
Currently, there are talks between the Selangor Government and Bank Negara to make loan approvals simple and hassle-free for first-time home buyers in the state. Since many Malaysians have low repayment capacity, it adversely affects their respective credit scores.
How Can Your Credit Score Be Tracked?
In Malaysia, there are two bodies which can monitor your credit history. CCRIS and CTOS. While CCRIS is managed by the central bank, CTOS is a private company that monitors credit history. When you apply for a housing loan/financing, the bank uses these systems to track your financial capabilities. If you have defaulted on a loan payment or have applied for too many mortgage loans with different banks, there are high chances that your loan will get rejected.
What is an Ideal Credit Score?
The factors that determine your CTOS score in Malaysia are your payment history, if you owe cash to any lender, if you have a credit history or not, and how much credit you have applied for. A good CTOS score is from 718 to 850. Anything between 651 and 717 is considered fair and if you score below 650, you are considered to have a bad credit score.
How Debt Service Ratio (DSR) affects Your Home Loan Approval
DSR is the ratio which a bank uses to calculate how much money an applicant is eligible for borrowing. The three main factors that determine DSR is the income of the applicant, if the applicant has an existing debt, or if the applicant has applied for a new loan. The DSR can vary from bank to bank. For instance, applicants who earn less than RM3,000 will be given a DSR of 60% of their net income by Bank A and 60% of their net income plus an additional 10% if they are a professional by Bank B.
Most borrowers are not aware that the DSR is calculated taking the net income instead of the gross income. Instead of checking with different banks, borrowers need to check their own DSR and do a research to check the DSR approval percentage of various banks. If the borrower checks their DSR and is 70%, they need to shortlist banks that offer more than 70% DSR, so that their loan is easily approved.
Defaulting on a House Loan
When you default your monthly mortgage payment, it will be recorded in your credit history and will remain there for the next 10 years. Even one instance can stand out in your report. If you approach any financial institution for any financial products with a loan defaulting in your credit history, you can be rejected credit until you improve your score. The more you default, the more badly it reflects on your score.
When you are unable to pay your monthly mortgage instalments, you will be charged late payment charges, which is usually 1% of the outstanding balance. If you continue defaulting payments, the bank can take strict action against you.
If you are finding it difficult to repay the loan, you need to negotiate the terms with the bank so that you will be able to pay off the loan easily. If you have just retired, you need to discuss how you will continue making the monthly instalments for the rest of the tenure. Many Malaysians take the help of agencies such as Credit Counselling and Debt Management Agency (AKPK) to assist them to pay off their debts. As of October 2016, AKPK has assisted around 11,700 Malaysians to settle their debts.
Apart from defaulting on a loan, you can also get a bad credit score if you don’t pay your credit card bills on time, if you don't have an established credit history, if your loan application was rejected, if you exceed your credit limit, if your cheque has bounced, and when you change your NRIC more than once. Try to implement good financial behaviour toincrease your credit ratings.It could take a few years, but the effort will pay off when you need to borrow money from the bank in future.