Monograph:Mortgages Contents
(8) Considerations in Approving Mortgages
 
  1. Repayment ability
     
   

The bank will primarily look at the borrower's monthly income to see whether or not he is likely to be able to pay his mortgage instalments.

Besides income from the borrower's job or business, such as salary, commission or profit, the bank may also consider the borrower's other sources of regular income such as rental income from a leased property, ownership of income-generating equipment, or a vehicle. Therefore, if a borrower has no regular job or has retired but has substantial assets that can earn a stable monthly income for him, it is still possible for the bank to approve his mortgage loan application.

The bank will usually adopt its maximum acceptable debt-to-income ratio (for example, 50%) and require each monthly mortgage instalment not to exceed such a percentage of the borrower's monthly income. When calculating the debt-to-income ratio of a particular borrower, the bank will also take into account other known repayment obligations, such as loan repayments to other banks. When a personal guarantee is necessary, the income of the guarantor will usually be included in the calculation of the relevant debt-to-income ratio.

The bank will also take into account the applicant's credit history and be concerned to know if a borrower has failed to honour loan repayment obligations before.

     
  2. Types of borrower
     
   

If the borrower is a salaried employee in a stable job with provable regular income, the mortgage loan application will be more straightforward.

If the borrower does not have regular income, for example, in the case of a salesperson whose income is primarily dependent on commission which varies from month to month, the bank may require more stringent proof of repayment ability (for example, average earnings over a longer period of time) before approving the loan application. The outlook for the industry in which the borrower is engaged is also an important factor for the bank to consider.

For a borrower who is a sole proprietor or a partner in a partnership, the bank will ascertain the profit and turnover of the business by looking at its accounts, financial statements, bank balance and money flows. Sometimes a site visit to the business may be necessary for the bank to assess how the business is running.

In the case of a limited company, in addition to reviewing the accounts and financial statements of the company, the bank will normally require a guarantee of the company's debt to be executed by a guarantor who is usually a director or major shareholder of the company. The bank will also assess the repayment ability of the guarantor in the same way as if the guarantor were the borrower.

Regardless of the type of borrower, the bank will look at the trade, profession or business the borrower is engaged in. The bank's evaluation of the future prospects of such trade, profession or business is an important factor that will influence the bank's decision on the loan application.

     
  3. Relationship with banks
     
    The borrower's relationship with the bank is also an important factor that the bank will take into account when approving a mortgage application. If the bank is well acquainted with the borrower and knows his financial strength, the bank will be more prepared to grant him the mortgage loan on more favourable terms. When assessing its relationship with the borrower, some of the factors the bank will usually look at include:
     
   
a. The length of time that the borrower has had a relationship with the bank, through maintaining accounts or other business dealings;
   
b. The range of the bank's products that the borrower is using; and
   
c. The balance of the accounts being kept by the borrower with the bank.
 
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