Are you thinking of splitting the cost of purchasing a home with someone else? Before you apply for a joint loan with your wife/husband or best friend, make sure to go through these 4 considerations first.
Purchasing a home, especially if you are a first-time homebuyer, is not easy. Although Malaysian property prices have been moderating in terms of price spikes in the last couple of years, there is the matter of the other elephant in the room – stagnating wage growth.
According to the Valuation and Property Services Department, as of Q32018, the median house price in Malaysia stands at RM293,000 while Selangor’s figure topped RM382,000. And if you are an urban millennial newly introduced to the workforce as most first-time homebuyers are, such figures seem astronomical when compared to your monthly salary of roughly RM2,500 – RM3,000.
Without support from your parents or relatives, buying a home is not a realistic prospect until you are well into your working career with a substantial amount of savings.
To put things into perspective, let’s assume that you are a 26-year old Malaysian earning RM3,000 (and a RM6,000 annual bonus) with the following monthly obligations – Car loan (RM500) and PTPTN (RM100). By utilising our home loan eligibility calculator, you can see that you only qualify for a property worth RM156,815.
Given that property prices are out of the masses’ income brackets, an increasing number of people are deciding to purchase a house with friends, family members and their partners/spouse. Unless you’re able to purchase the residential property upfront in cash, this would entail taking out a joint loan. A joint loan is an attractive prospect as two or more people would be able to pool their resources to buy a larger or more attractive home.
However, a joint loan can quickly turn from a blessing into a headache if you don’t take the necessary precautions beforehand. In Malaysia, one can apply for a joint loan with a spouse, family member, friends and even business associates – as long as they are at least 18 years old and not older than 60.
Here are four tips to guide you in preparation for taking out a joint loan:
1 Beware of incomplete documentation if you are self-employed
When applying for a joint home loan, all the applicants are required to provide proof of their income and tax payments. The documentation requested by a bank include:
• A copy of your Identification Card (NRIC) • The property booking form or receipt • The Sales & Purchase Agreement (SPA) • Latest 3 months pay slip (for Basic Salary)/Latest 6 months pay slip (for Basic + Commission Earner) • Latest 3 months personal bank statement (for Basic Salary/Latest 6 months pay slips (for Basic + Commission Earner) which show your salary credited as per pay slip • Latest EA form • Latest KWSP (EPF) statement • Income Tax – Latest Form B/BE with payment receipt acknowledgment • Any deposit statements such as fixed deposit, ASB or bonds (if any)
Here’s where it gets sticky: If one of the applicants is a freelancer or is without a stable monthly salary, there usually will be no record of payslips and EPF statements while their EA Form and bank statement is likely to not be furnished accordingly. Banks usually require such individuals to present two years’ worth of income history for evaluation. But there is no denying that freelancers or self-employed individuals without a stable and guaranteed source of income are likely to face a tougher time obtaining a loan.
If you or your spouse/friend/relative is self-employed, here are a few tips to help bolster one’s borrowing profile:
A) For EA Form: Declare all your income and pay your taxes on time.
B) For Payslips: Get a part-time job at a stable and reputable company. Make sure to obtain the minimum income required that will help supplement your main (albeit unstable, to the bank’s eyes) income stream.
C) For EPF statements: Make your own monthly EPF contributions, sourced from the income generated via your personal business. Banks look favourably on such a consistent pattern and this helps build your profile as a responsible and credible paymaster.
D) For Bank statement: Maintain a healthy financial profile and steer clear of (excessive) credit card/personal debt. You could even open a fixed deposit account with your target bank to increase your loan chances and back your borrowing position.
2 Of credit scores & DSRs – It is a team effort
Your credit score is the main determinant which banks use to evaluate your borrowing capability and whether you deserve to be granted financing in the first place. If you aren’t aware already of the 2 necessary credit reports, familiarise yourself with CTOS, a database which archives an individual’s entire credit history as well as Central Credit Reference Information System (CCRIS), which reflects your past 12 months of credit activities.
It is important to note that in a joint loan application, it is a “for better or for worse” situation, where banks will assess all the applicants as a single unit. Hence, to have a greater financing margin, all the applicants need to have good credit scores.
Next on the list is the debt-to-service ratio (DSR), which represents a borrower’s ability to service loan repayments. Your DSR is the ratio of your total debt against your monthly income after tax and EPF contributions have been deducted. A lower DSR indicates a lower risk of you defaulting. Most banks in Malaysia accept a maximum DSR of between 65-70%. However, it is advisable for your DSR to be lower than this.
Similar to credit scores, the DSR being scrutinized for joint loans is the combined DSR of all the parties involved too. For example, if you have a DSR of 70% and your husband’s DSR is 50% then the overall DSR will be the average of these two figures, which in this case is 60%.
3 What are the pros and cons I should be aware of?
Joint home loans are attractive in the sense that you will be able to obtain a larger loan as compared to a loan you would take out on your own. This would enable you to purchase higher-end and/or bigger properties. The interest rate offered on the loan would also be lower as banks perform affordability assessments on both parties applying for the loan.
However, most people often fail to account for the myriad of pitfalls that come with taking out a joint loan. Here’s an example: three friends, Ali, Bob and Charles take out a joint loan. Should Ali face financial difficulties and is unable to service the repayments, Bob and Charles will still be required to pay back the instalments on the loan. The two of them will have to fork out the additional repayment sum or risk the property being seized by the bank.
Worse still, if Bob and Charles are unable to come up with the extra monies and resulting in a loan default, their credit scores will take a hit as well with the loan default showing up on their credit reports. This would mar their ‘borrowing profile’ and affect any future loans they might plan to take as they are now labeled as bad paymasters in the eyes of the bank.
Another potential stumbling block is that it may be difficult to achieve a mutual understanding when it comes to decisions regarding the property. For instance, if Ali wishes to sell the property for personal reasons, but both Bob and Charles disagrees, Ali will be caught in a limbo.
There are also cases where the property is registered under the name of only one party. Should this happen, after the loan has been fully repaid, the property will then belong solely to said party. Hence, it is essential to prepare a legal agreement beforehand that details the procedures that should be undertaken in the event of any problems that might arise between the involved parties.
4 Are you ready for unforeseen circumstances (death/divorce)?
It is easy to assume that marriage and friendships are for life. However, love can fade and so can friendship. Divorces between couples are famous for causing long and drawn out legal battles over who gets what.
The death of your spouse in a joint loan agreement could throw the ownership status of property into limbo as the property will go to the deceased’s heir(s) as stated in his/her will as opposed to you.
In the case of death of one of the parties, to avoid complications – such as defaulting on the loan, banks require you to apply for Mortgage Reducing Term Assurance (MRTA) or Mortgage Level Term Assurance (MLTA). There are many scenarios that could play out should one of the parties pass away.
Now if you bought a property with a friend and he/she wishes to sell the property, you have two options. You can either buy out your friend’s share of the loan or allow the property to be sold. The proceeds from the sale will be divided equally between the two of you.
Prudent couples or friends who are taking out a joint loan would do well to prepare for the many possible future scenarios that could cast their property ownership into jeopardy. Hire a lawyer before taking out a joint loan to draft an agreement to avoid any disputes that might arise in the future. This agreement should detail the percentage of the home’s share each party is entitled to, especially if the involved parties contributed different sums for the down payment, as well as what happens in the event of a divorce or death.
It can be hard to talk about death, break-ups and falling-outs amidst the excitement of purchasing a home, but let us remind you – better safe than sorry!