Mortgage Level Term Assurance (MLTA): Fundamentals

Assurance which provides financial protection in the event of premature death or total permanent disability on a level term life basis. Most of the time, medical examination is not require if sum assured is not significant and age below 45. If require, such expenditure will be paid by the company. Basic traits are similar to MRTA.

Coverage

. Death

. Total permanent disability

. Critical illness (optional / depends on individual assurance's coverage)

Premium payment option:

. Single premium

. Premium could be amortized / financed into a mortgage ( will increase the cost by 50% ~ 100% depending on the tenure of mortgage)

Basic mechanism

. Sum assured of MLTA is leveled throughout the covered period.

. Advisable to insure at initial loan amount.
. Major advantage of MLTA over MRTA is that, it mitigates the risk of insufficient sum assured during the time of interest rate goes beyond the protection barrier by having a non-reducing sum assured throughout the protection period. (for more elaboration on such risk, please refer to MRTA session)

. A simple chart below shown the MLTA's coverage (In blue) and mortgage outstanding (in pink) throughout the tenure

Mortgage: -Tenure: 30 years, Loan amount: 300k

MRTA: Protection period: 30 years, Sum Assured throughout the tenure: 300k

Estimation of premium payable

Age: 25, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 10,780

Age: 35, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 24,130

Common Misconception & Misleading

. Quite a great number of agents exploit insufficient financial understanding of borrowers by providing misleading idea. They tend to promote common life insurance products / savings products / investment linked products to borrowers and named the products as "MLTA" but in fact, the products are not MLTA.

Although insurance products above do show a similar protection and coverage like MLTA, its variety, flexibility to customize its coverage (ie. bringing in medical card as rider, so forth) and length of protection period is far greater than a standard MLTA. All of such customization and greater coverage imply a greater cost of insurance, thus, insurers have to pay more premium, most of the time, a couple of hundreds on monthly basis.

RAM Credit Information Sdn Bhd (RAM)

Information about RAM could be assessed via the official website:

http://www.ram.com.my/

CTOS (CTOS Sdn Bhd)

Private credit reference agency. Perform collation of factual information from various sources and provide such information to the institutions as reference for background study.

Informations which are visible from a standard CTOS report:
Section A: Identity Verification Guide (IVG)
- report inconsistent name or ID number for subjects, covers both individuals & business entities 
Section B: Group Exposure / Internal List (GXIL module)
- report whether the said subject is within the monitoring list or internal list of institutions.
Section C: Directorships and Business Interests (DABI module)
- report past & present directorships & business interest
Section D: Summons, writs, bankruptcy proceedings, foreclosure, etcs
Section E: Trade Referees & Subject's Comments

**Self check is free and can be done at CTOS office.

Frequently Asked Questions about CTOS:
http://202.186.60.146/CTOSHOME/faq.html


CTOS Sdn Bhd (209649-U)
Unit A-8-4, 8th Floor, Megan Avenue 1,
No 189, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia
Tel: 603-2770 8833   Fax: 603-2770 8834
E-mail: gen@ctos.com.my

Central Credit Reference Information System (CCRIS)

Information about CCRIS could be found via the link below:

http://creditbureau.bnm.gov.my/

Fundamentals of valuation - The process

Majority of institutions require a formal valuation report has to be compiled by designated valuer appointed by the bank when it comes to refinancing / top up / new purchase from secondary market to confirm that the property is priced adequately

How it's done?
Step 1. When an applicant engage a mortgage consultant for application, the consultant will contact the valuers who associate with the bank in confirming the indicative property value verbally.

Step 2. Application will be submitted for approval. Offer letter will be printed when approval is granted.

Step 3. Borrowers to accept the offer.

Step 4. Within 2 weeks after the acceptance of offer letter, instruction will be given from the bank to the respective valuation firm (which agreed on the price at Step 1) to produce a formal valuation report. A valuer from the firm will contact the borrower to liaise with current owner to visit the property. Photos and evidence of renovation works will be taken and collected.

Step 5. A formal valuation report will be compiled within 1- 2 weeks after the inspection and dispatched to the bank. (Some of the valuers will give a copy of the report to the borrower, some might not.)

Mortgage Reducing Term Assurance (MRTA): Fundamentals

Assurance which provides financial protection in the event of premature death or total permanent disability on a reducing term life basis. Most of the time, medical examination is not require if sum assured is not significant and age below 45. If require, such expenditure will be paid by the company.

Coverage
. Death
. Total permanent disability
. Critical illness (optional / depends on individual assurance's coverage)

Premium payment option:
. Single premium
. Premium could be amortized / financed into a mortgage ( will increase the cost by 50% ~ 100% depending on the tenure of mortgage)

Basic mechanism
. Sum assured of MRTA is projected based on amortization method which is the same calculation method for mortgages and exhibit a pattern of reducing sum assured throughout the protection period.
. To hedge against the risk of interest rate fluctuation, the rate which used for the projection of protection is ranging around 7% - 9% (or a rate which higher than the effective market rate by 3% - 5%)
. A simple chart below shown the MRTA's coverage (In blue) and mortgage outstanding (in pink) throughout the tenure
Mortgage: -Tenure: 30 years, Effective interest rate: 4.3%, Loan amount: 300k
MRTA: Protection period: 30 years, Effective rate: 9.0%, Beginning Sum Assured: 300k

Estimation of premium payable
Age: 25, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 7,990
Age: 35, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 16,570
Age: 45, Tenure: 25 years, Sum assured: 300k, Rate: 9%, Single premium RM 32,200




Risks & Important Notes
. Throughout the whole tenure, the sum assured is projected to fully cover the estimated outstanding with sufficient buffer (the gap between the pink and blue lines). However, it should be noted that the buffer is much smaller during the beginning and ending period, implying a risk:
If the fluctuation of interest rate is volatile during these period of time which resulted the effective interest rate of the mortgages breach the protection's coverage for substantial time, it will cause the outstanding to be more than the projected sum assured. So, if any unfortunate event hit the insured during these times, the sum assured might not be able to fully cover the liability. 


. MRTA is not a life time plan and only can cover up to age 65 ~ 75, depends on individual companies' coverage.

. Initial beneficiary of the policy is the institutions if MRTA is bought with the panel insurance companies of the banks and the policy will be kept by the institution instead of borrowers. (Unless you purchase the policy with other insurance companies, then, you would have your flexibility to assign your own beneficiary and safe keep)

. Quite a number of agents claims that MRTA is not transferable to a new mortgage. The fact is, assuming the mortgage is settled earlier than expected while the MRTA's coverage is still active. There are several options which available to the insurers:
1. convert it to term life. Some paperwork to be done over the counter.
2. surrender the policy and cash out the remaining value.
3. remain as it is. Assign it to new mortgage if it is acceptable in the future.
However, assigning an old MRTA to a new mortgage will not be able to provide full coverage for the latter, the shortfall will be even obvious if the old MRTA just have a few remaining years to go.

The chart below show the scenario which an old MRTA (pink line) used to insure against new mortgage (dark blue line). Grey area is the effective coverage which provided by the said MRTA while the light blue area indicates the unprotected outstanding.

MRTA: Documents to be furnished in the event of claims

1. Notification of Death Claim by the banks
2. Death Certificate certified by the bank officers
3. Original copy of MRTA certificate
4. Copy of NRIC of deceased
5. Claimant's statement (could be obtained from the bank or the insurance company)
6. Doctor's statement
7. Police report (if applicable)

Semi Flexi: Fundamentals & Misconceptions

Semi flexi mortgages offer the flexibility of prepayment withdrawal which inferior to Flexi mortgage but more flexible than regular term mortgage.

The major distinction between Flexi, Semi Flexi, and regular term mortgage is the flexibility of prepayment withdrawal and charges incurred for such withdrawals to be carried out.

Flexi: As the additional fund is mainly accumulated within the current account for interest savings purpose while cheque books are provided, the withdrawal of fund is as easy as writing a cheque or via online transfer. The cost of withdrawing the funds is just merely equivalent to the cost of piece of cheque or online transfer's charges.

Semi Flexi: Payment of additional fund has to go to the loan account. Practically, having a Semi Flexi mortgage would require borrowers to open a regular savings / current account at the financiers' branch for installment auto debit purpose. Majority of mortgage products in the current market fall under this segment. Although additional payment into the loan account will not knock off the principal by default, it will still result in interest savings as well for the additional amount which paid (this interest savings feature might not applicable to all the banks). However, when it comes to time of withdrawal, the charge is around RM10-RM50 per transaction, depending on bank's discretion. Such withdrawal could be done by transferring the excess from the loan account to the savings / current account via online banking / instruction over the counter / via machines.

Regular Term: Payment of additional fund has to go the loan account. By default, all additional payment / excess will be treated as advance payment for the future installment, thus, the excess will not result in interest savings. Withdrawal of the additional payment to the loan account require written notice to the branches which hold the borrowers' file. Charges per transaction is around RM 25 ~ RM 50.

A simple illustration in calculating interest charge:

Misconceptions
. "Semi" full flexi mortgages: Certain mortgages which given to the borrowers during 2009 - 2010 were labelled as "full flexi" with the provision of current account but without a cheque book. To certain extent, such mortgages do not fully cater the full flexibility of withdrawal but do offer the interest savings feature by maintaining balance within a current account but withdrawal of fund requires instruction given over the counters or via online transaction.

Flexi Mortgage: Fundamentals & Misconception

The product is structured to provide a mortgage facility which could allow borrowers to enjoy immediate interest savings by maintain an amount of positive balance within a current account. Similar products are offered widely by the banks ie. MortgagePlus by Hong Leong, Savelink by Alliance Bank, so forth.

Fundamental mechanism

The mortgage is set up with a loan account and current account. For any balance which maintained in the current account, it will incur corresponding interest savings. For instance, a simple numerical example, a loan account which shown current outstanding stands at 500k and a linked current account with positive balance of 200k, thus, on a daily basis, the interest will be calculated based on the differential of, 500k - 200k = 300k, instead of the entire outstanding of 500k.

** The current account will come with a cheque book as well, market price is RM 200 to be paid for setting up such facility (not refundable in most cases), monthly maintenance fee of RM 10 is chargeable.

Main advantages are:

. As long as you could maintain a significant cash pool within the current account, such mortgage will induce a significant interest savings throughout the tenure.

. Avoid the hassle of prepayment / paper work to knock of the principal with additional payment which commonly observed by borrowers with regular / standard term loan.

. Allow the withdrawal of fund / maintain higher liquidity while enjoy short-term interest savings as compare to term loan.

A simple illustration in calculating interest charge:

Common mistakes / Mispresentations / Misunderstanding

. I suppose the additional payment will knock off the principal but it seemed like it did not happen.

. I paid a large sum of prepayment to the loan account but the month-end statement shown no interest savings!

. I was told that the additional fund which paid to the loan account will knock off the principal and I could redraw them easily but I found out that the additional fund neither knock off the principal nor redrawable-easily!

. I had poured much money into the current account but the interest savings does not happen.

Some of the bankers might initially deliver a wrong message to the clients that such mortgage allow unlimited amount of prepayment to be made to knock off the principal and reduce the interest cost, and the additional fund within the account is withdrawable.

The fact is, a flexi mortgage product is NOT structured to allow the outstanding to be knocked off at any time in any amount. The loan account of a flexi mortgage is functioning similarly to a standard / regular term loan mortgage. Thus, if any additional amount / payment is made to this loan account, by default, it will be treated as prepayment for next installment (so, it will not bring you any interest savings or knock off any of the principal).

A correct utilization of interest savings feature is, putting the additional fund into the current account and interest incurred will be calculated base on the differential between the current account and loan account. It should be noted that no matter how much money had been putted into the current account, it would NOT affect the outstanding balance in the loan account. The direct impact is on the interest calculated instead of outstanding.

Some existing users of such facilities experienced no interest savings for putting money into the current account. This problem might caused by the current account which opened is not for this product. Type of current account which serves the flexi mortgage is not the same type as a regular current account, thus, to ensure the right type of current account is opened, borrowers are advised to bring along the offer letter to the branches and present it to the staffs over there. Opening a regular current account and putting the money inside will not serve the purpose.

Progressive payment structure based on completion of work (Non-landed properties) - Schedule H

** Applicable to residential properties only

Progressive payment structure based on completion of work (Landed properties) - Schedule G

** Applicable to residential properties only

Housing Development Act (Control & Licensing) 1966 (HDA 1966)

Installment / interest payable during construction (regular,interest in principal,DIBS)

Mainly 3 types of arrangements for mortgages for properties under construction.

Regular / standard arrangement

As disbursements happen on a progressive basis, the interest payable will be calculated based on corresponding disbursed amount and borrowers are required to pay the interest cost during the construction period. For instance, the first 10% of loan is disbursed to pay for the bill of the works below ground level, thus, interest which calculated based on this portion of disbursement is payable throughout the construction. All the payments during the construction period is solely for the interest incurred by the disbursement and nothing goes to knock off the principal.

Interest-in-principal mortgage (zero payment during construction)

There is a type of mortgages in the market which allows the borrowers to serve the installment after its completion / after a fixed percentage of disbursement (ie. >97.5%). The treatment is to accumulate all the interest incurred during the construction period and factor them to become part of the outstanding amount. ie. let's say the initial loan amount is RM 600k and total  interest cost which incurred during the construction period is around RM 24k, by the time of completion, the total outstanding will be RM 624k and installment is calculated based on the latter amount.

Developer interest bearing scheme (DIBS)

During the construction period, all the interest cost which incurred by the mortgages will be paid by the developers instead of borrowers. This arrangement is only available with certain projects and financiers (sometimes, it will be specifically assigned to certain branches). DIBS will come with a clause provision which stated that in any events, if the developers do not pay the interest, it will become the responsibility of borrowers to pay the interest due.

How does non-basic pay income in influencing my loan approval? (For employed)

The Calculation

For non-basic pay incomes, basically, it will be distinguished base on its stability and corresponding calculation used will be differ as well.

Implications

The income which paid on a regular basis and in a fixed amount ie. fixed allowances, would be likely to be factored in full while for those which having fluctuation ie. commission, would be factored in a portion, subjected to banks' guideline. (10% ~75%) Sometimes, the percentage which used is just too small and cause the actual income level to be underestimated and the application is rejected.

Type of non-basic pay income earners

Variable income earner (commission based / OT based: ie. insurance agents, property agents)

One of the issue commonly faced by applicants is, they are commission earner and they encounter the situation whereby the proxy income which calculated based on a percentage of their receivable is insufficient to secure a loan approval.

For instance, Mr A is an insurance agent who earn average income of RM 6,000 on a monthly basis and he wish to acquire a mortgage amounted to RM 500,000.00. Consider the tenure that he takes is 30 years, the projected monthly installment is roughly about RM 2,474.00

Base on a simple calculation, commitment over income ratio is roughly 2,474 / 6,000 x 100% = 41.2% which is on the fence, he might stand a chance in acquiring a mortgage. Problem is, as per Bank A's guideline, they are only taking 50% of his commission income in calculation, which resulted the ratio inflated to 82.4% and the application is declined.

One of the way to mitigate the impact of such unfavorable guideline is to provide income documents which can generate a broader view in term of time frame, preferably to be 2 years record to prove the stability of commission income that earned. ie. tax form with receipt payments, bank statements, pay slips. Most of the time, this kind of documents will comfort the officers if the numbers within are positive and stable throughout the time as the banks need to assure that you have sufficient and steady source of income to service the installment in the future and this kind of history will help you.

Allowances earners (ie. government servants, military personnel)

Certain applicants may have their greater portion of income generated from allowances. Such allowances can be factored in full amount provided the amount is paid in fixed and on regular basis.

Bonus earners (ie. banking, sales, corporates)

Applicants who have a big sum of bonus which to be paid once/twice/several times annually will have to furnish a longer record of income documents as well for such bonus to be factored in. If the bonus is promised to be paid in a fixed amount and it is stated within the letter of employment, kindly furnish such document as a proof.

Advices:

Please provide longer record of income documents to the institutions if your income does show the same traits as above. It will help your loan approval.

How does renovation cost factored into property price?

Significant renovation will boost a property's value when it comes to refinancing and resales. Questions which commonly asked in respect to this issue are:

(i) How much of the initial renovation cost will be factored into the resales price / property's value?
(ii) What should be done to preserve the renovation's value?

(i) By nature, renovation is a part of torn and worn. Approximately, valuers will factor in 50% of the initial renovation cost into the property. However, age of the renovation might affect the used percentage for calculation, thus, the percentage will be higher when the renovation is new.

Rule of thumb is, CURRENT STANDARD UNIT VALUE + 50% of initial renovation cost = intrinsic value of property


(ii) Good safe keeping of initial receipt is essential in proving the value of renovation especially when the costly materials and renown workmanship come into place. The receipt should have all of these details and corresponding pricing stated clearly as all of these are not visible via naked eyes. A solid proof is essential to back up your claim.

Verbal indicative value in helping avoid buying overpriced property / Unable to get 90% margin due to overpricing

Many do not realize that they can avoid trapping in the scenario whereby they are unable to acquire sufficient financing margin from the banks due to overpriced properties and get their deposit forfeited.

One of the way to avoid such trap, is getting verbal indicative value with the helps from bankers / mortgage consultant prior in making purchase decision.

A verbal indicative value is a price which preliminary and verbally agreed by the valuers in recognizing current selling / purchasing price of a property. While a formal valuation report will only be produced after a loan offer is accepted and charge will only incur at this stage.

How could it be done?
For property buyers / loan applicants, it is indeed very simple that you just furnish all the property details to the consultants and they could help you in checking whether this pricing could be agreed by the valuers and therefore, agreed by the banks.

Is the value given applicable to all the banks?
Not happen always, a price which agreed by a bank's valuer, let's say Valuer A might not be applicable to the other banks as Valuer A might not associated with that banks and they won't recognize that. 

Will an indicative value cost any cents?
Verbal indicative value will not incur any cost as the consultants just get the number verbally from the valuers and it will only be confirmed and effective when it comes to formal valuation report. Thus, the number itself could be no longer applicable after weeks.

Can I call the valuer to check on my own?
Possible. But sadly to say, most of the time, they won't entertain you on an ad hoc basis unless you pay them to conduct a formal valuation report.

Why some consultants won't get back to me on this info?
Please keep in mind that bankers / consultants are just HELPING you to get an indicative value and this kind of assistance is costly to them. Without applying a loan with them, normally they are unlikely to help you on this because getting a value is a tedious job as getting a best quote from the firms might cost them a whole working day, sometimes, it might cost them a few days of works. And, end of the day, they may not have your business but you get the number and you go to other banks.

Property Valuation for mortgage - Charges if valuation fail to match

** applicable to secondary market (subsales) & refinancing

Majority of banks practice a formal valuation report to be submitted to the banks as a part of collateral against the mortgage. Many concerns that what if, the valuation is unable to match the purchasing price, what kind of charges might possibly hit the applicant.

Let's us segment it into several portions to answer this kind of concern:

A. Could a valuation report possibly come out to be a value which lower than expectation?
B. Do I have to pay the charge if such event happen?

(A) Yes, it could happen but the possibility is quite low if the borrowers are doing everything right at a very initial stage. Normally, a valuation report will be imposed for a purchase of completed properties. When an applicant go for a loan application, the mortgage consultant should get a full details of borrower's property and conduct a verbal indication which supported by various valuation firms (associated with the banks). All the details will be provided to the firm and an indicative value will be given base on that.

If the indicative value given is able to match the purchasing price, then the mortgage consultant will proceed on with the loan application and if such application is successful, an offer letter will be produced. If it fail, then the consultant will inform the applicant that the banks are unable to agree on the purchasing price and thus, the application will be halted.

A formal valuation report will only be compiled after the offer letter is being signed (meaning that the applicants agree to take the loan offered by the banks). A valuation executive will make an appointment with current property owner, visit the properties, do some checking, take some photos, verify all the previous details given and conduct some interviews. Within 2 weeks after the visit, a formal valuation report will be dispatched from the firm to the banks.

Now, question is, what could possibly go wrong. Problems might occur if there is any discrepancy happen in properties details. Some of the inexperienced or green agents / mortgage consultants do not have a good picture in collecting full details of properties which result in missing some details or adding something which in fact, is not there, especially when it comes to the size of the property and renovation.

For example, a real scenario that happen to a consultant before. A client apply a loan with the bank and he just merely provide all the property details to the consultant via written and no supporting documents to verify such information, stating that the build up of a double storey house is  8828 sqft but in fact, it is just 8288 sqft. The consultant just did indicative valuation based on former information and an offer was accepted based on that info. When it comes to the time of visit, the valuer notice that the size of house is smaller than the given info, thus, he slash the value and in turn, slashing the financing margin. This is because the bank give a 90% loan based on the valuation report, if the value lower, then the loan amount will be slashed as well.

How do we avoid such kind of problem?
Providing correct property information to the banks is essential in making the things right at the first place. Some of the documents shall be collected and verification should be done. It might sounds troublesome but it will save borrowers from any potential problems.

Documents which essential in avoiding such chaos:
i. previous copy of Sales & Purchase Agreement
ii. copy of land title
iii. copy of receipt from renovator
iv. photos of significant renovation

(i) All of the basic information about the property could be found within this agreement ranging from basic fitting, land specification, ownership, floor plan, so on. Especially from First Schedule to Fifth Schedule.
(ii) Reveal all the facts about the land ranging from its type, remaining leasehold tenure, land office, ownership, charge to which financier, so forth
(iii) Reveal any significant renovation that had been done with the pricing. Such receipt must have the details of renovation and corresponding pricing. Better if materials are stated as well. This kind of documents is meant to be kept if borrowers plan to renovate their house in the future especially when the investment is huge (more than RM 100k) because with such a solid proof, it will boost the selling price of the house.
(iv) Some of the valuers might not be comfortable to give a higher indicative value for the properties which have significant renovation because they don't have any proof. Sometimes, the borrowers have to send them some photos as proof in getting a higher value for the property.

It is every parties' responsibility in getting everything correct. During the first stage of purchase, right after purchasers sign the booking receipt, the agent should have provided the purchasers with these documents (i),(ii),(iii) for the ease of loan application. The owner has the responsibility to furnish the agent with these kinds of documents prior the deal is confirmed. While for the photos, purchasers can take it on the spot during the visit. After all, the consultant would have to verify all the info is correct for the indicative value to be given.

(B) Yes, borrowers have to pay for it even if the formal valuation report went wrong. An offer is signed with the terms stated that if borrowers don't want the offer, they have to pay all the cost which had incurred (including legal fee as well). Assuming something wrong with the properties info and eventually, the valuation cannot match the purchasing price and the borrowers don't want the offer anymore. They have to pay for the cost that incurred by the firm.

How much would it be?
The valuation report is charged based on the property price. Same for this as well.

Heard that some banks are notorious in charging high interest if you miss out a few installments. Is this applicable to all the banks?

Yes, readjustment of rate due to late payments is applicable to all of the banks. The concern is only on 2 things:
(i) what is the readjusted rate for principle? and
(ii) how long does the banks can tolerate with late payment?

i. Normally around BLR + 0% ~ BLR + 2% as per current offer.
ii. Could be in 2 methods. Depending on how the terms set in your offer letter.

1. accumulated late installment of 1~3 months (i.e. you did not pay installment of July, Aug, Sep)
2. continuous late payment of 1~3 months (i.e. you paid July installment on Aug, Aug installment on Sep, Sep installment on Oct, in total, you have 1 month in arrear in each of the month)

** please rmb that there will be a higher rate charged on the late installment as well, other than the readjusted rate on the remaining principle

How do they inform late payment?

i. inform via letters. (commonly practiced by cost efficient banks for mild late payment and small loans)
ii. inform via calls. (practiced by all the banks especially cash oriented banks, HLB)
** but imposition of readjusted rate, they have neither responsibility nor obligation to inform you about this when they do it. No need to be mad with them as within the agreement, they had reserved the right to do it in this way. Don't ask me which bank will inform you about this, because all banks won't do it verbally.

When a readjusted rate had been imposed, the only way to revert it back to the initial approved rate is via written letter and THE BANK HAS THE RIGHT TO IGNORE IT AND YOU CAN'T ARGUE WITH THEM. This term is set in the agreement that you signed. (unless your loan was taken with them more than 5 years ago, then you might stand a chance)

It might sounds like banks are notorious bloodsucker, but, please keep in mind, you are not paying ppl's money on time. Forgetful / busy to pay is not an acceptable term in financing.

Mortgage with Overdraft facility and Full Flexi mortgage. What are they? How do they function? Do I really need them?

There are 2 major types of line of credit facilities which function similarly,

Overdraft: Your home loan account is linked to a current account which allow you to withdraw your money as easy as writing a check. Basically you pledge your home to the bank in order to get a liquid cash account to withdraw the amount you need.

Full Flexi: Hybrid accounts which combine home loan with current account which works similar to overdraft facility.

The main difference between them is how interest and principle is served throughout the tenure. Assuming that you have a 300k overdraft for property A and 300k full flexi for property B which are fully utilized and now you have to pay for them. Assuming the interest charged on both of them now is 1k.

For A: You must at least fulfill the interest of utilized credit. 1k on monthly basis. Available amount of credit line will be same, 300k every month. Upon end of tenure, all outstanding must be paid in full. The banks reserve the right to call back the utilized overdraft anytime. Most of the time, the banks will question & check potential financial problem if the utilization is huge and the outstanding remain constant for more than 1 month.

For B: You must fulfilled interest of outstanding credit + knock off a portion of projected principle every month. Thus, payment = interest of outstanding + a portion of principle. Available amount of credit line will reduce every month, 300k, 299k, 298k, 297k... Upon end of tenure, the last payment will be projected to reduce the outstanding to zero.

Do you really need this kind of facilities?

Most of the time, we will encounter a situation that the bankers tend to hard sell this kind of products by boosting their interest savings feature. And yet, please be cautious that although overdraft or full flexi might sound attractive to us as it offers flexibility of credit but it does not necessary fit to everyone. As limited info is given, I will just give a brief clarification which might helps you. Normally, we would judge its fitness to our clients based on 2 elements and I will further elaborate the situation in 4 different simple scenarios.

1. Your intention: (A) purchase of property or (B) refinancing + top up
2. Cash flow pattern: (C) owning strong cash reserve or (D) not

I. (A) + (C) : recommended
II. (A) + (D) : not recommended
III. (B) + (C) : recommended
IV. (B) + (D) : depends on purpose of fund

Scenario I. Purchasing of property with strong cash pool
Assuming your purchase a property with 90% margin and you are a business man with a stable cash pool on a monthly basis, let's say will account to 70% of your mortgage. You could possibly putting your cash in the full flexi/OD account, effectively, on every month, the effective interest of your mortgage is only calculated based on the 20% margin of outstanding, thus interest savings.

Scenario II. Purchasing of property with limited cash pool
Similar scenario setup as I but you don't have plentiful of cash. Eventually, you are worse off as compare to regular term loan. Most of full flexi /OD does incur some monthly charges, (ie. RM 10). In order to offset the cost of maintaining flexibility, you must at least maintain a positive cash balance of RM 2,400.00 (assuming the interest is 5% p.a., if higher, then the amount will grow). If you are falling under this segment, better if you take up regular term loan. Flexi /OD will only make you worse off.

Scenario III. Refinancing + top up with strong cash reserve
Assuming you have a property with current outstanding at 250k. You top up to 550k (250k for your existing outstanding and cash out 300k with flexi /OD). Its implication will eventually similar to Scenario I, interest savings + you enjoy a lower interest rate large credit as compare to non-collateral credit.

Scenario IV. Refinancing + top up with limited cash pool.
Similar scenario setup as III, but whether your position is going to be better off / worse off, is all depends on what your credit's purpose. Assuming that you get the 300k credit in flexi/OD, and you plan to spend it on something which generate lower return that the interest cost / no apparent return while you cannot recover them within a short period (<1 month). ie. spend them on education fee / renovation. And, you are unable to maintain some balance of cash within the account. It is absolutely make no sense in getting a flexi / OD for this kind of purpose as you worse off by paying additional monthly charges as compare to regular term loan while you are unable to enjoy interest savings.

Yet, the situation is different if you are cashing out for investment / speculation. (ie. futures speculation, daily trading). Assuming you intend to cash out and speculate / invest for a short period, capture immediate profit and pour back the fund to the accounts. Short-term utilization which yield a greater return than the interest cost will better fit your need if you get a flexi/OD.

Fitness of OD and full flexi is varying and subjects to individual's scenario.

Is it possible to get multiple loans approved and accepted within limited loan capacity?

Full Question posted:

Lets say if i have applied for a Bank Loan for Property Project A ... which has fully utilised my loan capacity (ie capability to loan based on my gross salary). And this Bank Loan project A has approved, pending issuance of Offer Letter.

Say, I'm interest in Property Project B, in another area. And i have applied Bank Loan from another bank... Based on my loan capacity, i am qualified for this Bank Loan project B (due to my commitment for bank loan project A, yet to crystalise). Therefore, i think i should be able to get Bank Loan project B approved as well...

Please advise if my above understanding is correct? Am i correct to understand that the banks will only check my qualification for loan during the offer stage, and if i were to sign the Bank Loan Offer Letter concurrently from 2 different banks, then i can purchase both these properties, without much issue on the bank loans? Would there be any difficulty come disbursement time from the banks?


Advice:

This is a bit complicated if you intend to exploit this loophole. First you have to understand what the banks could possibly know about your credit. Most of the time, banks obtain your credit history from CCRIS. Basically, there are 2 major components within the CCRIS which banks are interested to know about. 1. existing active credits 2. your recent credit application with all institutions (shown under "Special attention accounts")

For instance, the current situation is that: You apply a loan of 300k at Bank X, Y, Z for project A.
Within the CCRIS report, Bank X will know that you did apply a loan with 2 other banks with an amount of 300k (but they don't know exactly which bank) and the other 2 will have same view as well.

Within a short period, let's say 3 days later, you apply a loan of 350k at Bank X, W, T for project B and this additional credit will breach your loan capacity. Most probably, the outcome will be:
Bank X: as 2 applications go to their banks, definitely they knew all the details and they will reject the 2nd application.
Bank W & T: they only know that you did apply a loan of 300k with 3 banks and 350k with 2 other banks. Most of the time, they will just assume that you are applying a loan from different banks for a same financing if the amount of application is very close. If they are not comfortable with the numbers, then they will ask you to clarify and provide support on this before they proceed on.

Okay, now here are the highlights.

1. You might be able to exploit this information asymmetric in securing financing for additional properties with limited loan capacity, provided that: (i) loan applications are very close in date, (ii) loan amount is very close, (iii) different applications do not go to the same bank.
2. Qualification checking after the acceptance of offer letter might cause some problems as well. Because, if they did figure out via CCRIS that you accepted 2 offers and the similar credits start to disburse simultaneously later, definitely, they are going to question you. Not every banks are practicing double qualification checking after acceptance currently (except for some banks which are more cautious and alert, ie. foreign banks).
3. Theoretically, such arrangement can work. Practically, chance of success is very thin if you are purchasing units from different projects due to timing issue & difference in loan amount. Somehow, under-con projects are financed by limited end-financier. Choice of banks are not as wide as you thought. Most of the time, it will work on purchasing multiple units within the same projects, especially those projects ran by well-known & reputable developers. Mainly because, this kind of projects will have more end financiers and buying similar multiple units will result in similar loan amount. Thus, could possibly overcome all the obstacles above.
4. If such arrangement does work smoothly, will it cause any trouble when it comes to disbursement? Normally, it won't unless you are incapable to service the interest during the initial disbursements.

Moral is, if you want to exploit this, you have to know everything, plan every step & find the right person to do it and understanding the risk behind potential failure. Because if you fail, no banks will service you in the future.