Key Takeaways
- What is loan-to-value ratio? Calculated as a percentage, LTV compares the loan amount to either the property’s appraised value or its purchase price.
- Lower LTVs indicate lower risk, and higher LTVs indicate higher risk.
- LTV impacts not only the initial loan approval but also the overall cost of the mortgage loan throughout its lifetime.
- Understanding LTV and its impact on the mortgage approval process allows homebuyers to make informed decisions.
- It can also improve their chances of a successful homebuying experience in Malaysia.
What is loan-to-value ratio (LTV), and how does it play into a mortgage application in Malaysia, one might wonder?
LTV, sometimes referred to as the margin of finance, is a crucial factor in deciding the outcome of your mortgage application and the risks that come with it.
Knowing this important LTV measure is essential if you want to apply for loan approval. It could literally make or break your prospects of obtaining the mortgage of your dreams.
What is the Loan-to-Value Ratio?
To simplify, the loan-to-value ratio weighs the loan amount against the property’s appraised value when purchasing.
It is expressed as a percentage, and the formula is as follows:
LTV = (Loan Amount / Property Value) x 100
For example, if you are purchasing a property worth RM500,000 and securing a loan of RM400,000, your LTV would be (400,000 / 500,000) x 100 = 80%.
Why LTV Ratio Matters in Malaysia
In Malaysia, financial institutions use the LTV ratio as a crucial risk assessment tool, helping them measure the potential pitfalls associated with a particular mortgage loan.
A high LTV ratio means a high level of risk, as the borrower has a smaller equity stake in the property.
Conversely, a lower LTV ratio suggests a lower risk, as the borrower has a more substantial equity investment in the property.
Generally, Malaysian banks and financial institutions have preferred to keep the LTV ratio below 90% for residential properties.
However, in recent years, the government has implemented measures to ensure responsible lending practices and to curb speculative activities in the property market.
The Current LTV Ratio Guidelines in Malaysia
In 2013, Bank Negara Malaysia (BNM), the country’s central bank, introduced comprehensive guidelines governing the LTV ratio for various types of properties.
These guidelines were designed to promote a more stable and sustainable property market while also protecting the interests of borrowers and financial institutions.
For residential properties, the maximum LTV ratio is set at 90% for properties valued at RM600,000 or less. For properties valued above RM600,000, the maximum LTV ratio is capped at 80%.
However, it’s worth noting that certain financial institutions or banks may impose stricter LTV requirements based on their internal risk assessment policies.
The LTV ratio guidelines also vary for different property types and buyer profiles.
For example, the maximum LTV ratio for the purchase of a third or subsequent residential property is set at 70%, regardless of the property’s value. This is to discourage speculative activities and excessive borrowing.
Understanding the LTV Ratio
For home buyers, understanding the LTV ratio is essential when planning their property purchase. A higher LTV ratio means a lower upfront payment, which may seem attractive initially.
However, it also translates to higher monthly repayments and a higher overall interest paid over the life of the loan.
Additionally, a higher LTV ratio may make it more challenging to obtain favourable loan terms or qualify for certain loan packages.
On the other hand, financial institutions rely heavily on the LTV ratio to assess the potential risks associated with a loan application.
A higher LTV ratio increases their exposure in the event of a defaulted loan, as the property may not fetch a sufficient sale price to cover the outstanding loan amount.
As a result, some financial institutions may require additional safeguards for loans with higher LTV ratios, such as:
- higher interest rates
- private mortgage insurance
- more stringent credit requirements
Read More: Mortgage Loan Application Malaysia: A Helpful Guide
Why Was Your Bank Loan Application Rejected in Malaysia?
Applying for a bank loan in Malaysia can be challenging, and several factors might lead to rejection:
1. Credit Issues
- CTOS score below 550: Banks consider this a high-risk indicator.
- Late payments: More than two months overdue within the last six months.
- Special Attention Account (SAA): Flagged accounts.
- Trade references: Exceeding RM1,000.
- Legal issues: Including bankruptcy.
2. Income Factors
- Recent employment: Less than six months at your current job.
- Income in cash: Unverifiable income.
- No EPF contributions: Employment without EPF contributions.
- Contract or freelance work: Considered unstable income.
3. High Debt-to-Service Ratio (DSR)
- DSR over 70%: Monthly instalments exceeding 70% of net income make approval unlikely.
In situations like these, bankers cannot assist clients in securing a loan. Applying to these circumstances would not only waste time but could also worsen your financial record.
If rejected, you must wait six months before reapplying to the same bank, and each application can lower your CTOS score by 30 to 50 points.
Moreover, a CTOS score below 550 leads to immediate rejection by some banks.
How Bluebricks Can Help with LTV Ratio in Malaysia
Bluebricks is a bank loan and debt consolidation agency in Malaysia. Here’s how we help you achieve financial stability:
- Personal loan services
- SME loan services
- Mortgage loan services (to purchase a new home, refinancing and cashback purposes)
- Collateral loan services
Trusted Loan Consultancy Services
Our loan consultancy service is tailored to recommend the most fitting loan products based on your circumstances. We consider:
- The loan amount required.
- The urgency of the loan.
- Whether you or your parents own a property that has been held for over ten years.
- Your level of income.
- Your CTOS score.
Why Bluebricks
1. One of the Top 10 Leading Loan Agencies in Malaysia
Our loan agents represent both individuals and businesses, offering technical financial advice to help secure loan approvals. Even if banks have previously rejected you, we provide access to a broad spectrum of loan options. Our aim is to enhance the success rate of your loan applications and minimise rejections.
2. Over 10 Years of Experience
With over a decade of experience and current banking knowledge, we excel in securing personal, business, mortgage, and collateral loans, navigating challenges like CTOS/CCRIS, and guiding clients confidently towards successful loan approvals.
3. One-Stop Solution
We provide a one-stop loan service, compiling various options from banks and credit institutions for you. Simply submit your income statement, assets, liabilities, employment record, and credit history, and we’ll handle the collateral and documentation to streamline your loan approval process.
4. Full Financing with 100% Bank Loans
We ensure 100% bank loan availability to provide full financial support, making it easier to achieve your goals and build a positive credit history.
5. No Upfront Payment Required
Our no upfront payment policy is designed to ease your financial journey, allowing you to start your investment without initial costs, reducing immediate burden and demonstrating our commitment to your satisfaction and trust.
