|Repercussions||What You Can Do|
|Late Payments||– Late payment charges/penalty interest* and other finance fees |
*Note: The penalty interest rate is set by the bank and differs from one bank to another.
– Affects credit score
|– Immediately communicate with the financial institution to set things right|
– Make prompt payments to improve credit score
|Loan Default||– Property auctioned by the bank or financial institution and lose your property |
– Affects credit score significantly
– Could be charged higher interest rates and/or hard to borrow in the future
– Potential bankruptcy
|– Contact the financial institution soonest possible to renegotiate terms e.g. extend loan tenure, lower interest, refinance|
– Reach out to Credit Counselling and Debt Management Agency (AKPK) and enrol in its debt management programme.
– Seek financial relief schemes offered by banks, such as Maybank’s Financial Relief Scheme
– Use your Employees Provident Fund (EPF) savings to pay the loan
– To regularise your loan, prove yourself for 12 months by paying the instalments promptly
– Sell your belongings, find a part-time job, cut unnecessary subscriptions or utilities
– Sell the property
Late payments or loan defaults on home loans come with more severe penalties compared to other types of loans. It could lead to foreclosure by the bank, the property being auctioned off, and the possibility of bankruptcy. Learn more about the consequences of defaulting on home mortgage payments, or what could be done when the foreclosure process kickstart.
From May 2022 to November 2022, Bank Negara Malaysia (BNM) has increased the Overnight Policy Rate (OPR) by 100 basis points (bps) from 1.75% to 2.75% as the central bank of Malaysia started adjusting the OPR gradually as the health of the economy improved.
When BNM raises OPR, banks’ interest rates will be revised upward accordingly and raises the expense of loan borrowers and increases their financial risk.
Thus, some individuals and businesses could be pushed into financial distress and this could lead to loan defaults by borrowers.
The Differences Between Late Payments and Loan Defaults
Your loan becomes delinquent when you make late payments for a scheduled installment payment. This will result in late payment charges, penalty interest, and/or other finance fees being levied.
According to CTOS, a few late payments will not automatically wreck your credit score. A good overall credit history can outweigh one or two late payments.
While late payments and loan default stem from missing payments, the consequences are different.
A home loan goes into default when the borrower misses payments over an extended period or when the borrower fails to honour the terms of the loan. It’s much more serious, and could lead to bankruptcy if no action is taken by the borrower.
What Happens When You Default On A Home Loan In Malaysia?
Be it your credit card, home mortgage, car loan, or personal loan, borrowers will start accumulating extra fees arising from missed payments. Most banks do this to encourage prompt repayments.
If you fail to repay, then there are repercussions. For example:
- Home loan – Bank forecloses the property.
- Car loan – Banks can repossess the car. To get your car back, you’ll need to clear the outstanding debt and the cost of your car being repossessed.
- PTPTN – Borrowers could be barred from leaving the country. So, borrowers should check for any overdue amount and settle it or discuss with PTPTN at least 7 days before going on an overseas trip.
- Personal loan – Banks could deduct any credit balance from your bank account (if it’s the same bank) to offset the owed amount or repossess asset(s) as collateral.
One of the consequences could include dealing with debt collectors. Debt collecting is legal, if undertaken by licensed debt collection agencies.
Some of these agencies are civilised in their debt collection methods, while some might resort to more unpleasant ways.
In the event you can’t repay a debt of RM100,000 and above, the bank can file bankruptcy against you with the Department of Insolvency.
After bankruptcy is declared, the director general of Insolvency (DGI) will administer all your assets and manage it to repay creditors. The DGI has the authority to reverse any transfers backdating five years, and two years if you’ve sold any property.
Other restrictions include:
- Banned from travelling out of the country. You’ll need the DGI’s permission or a court order. Your passport will be held by the DGI.
- All or part of your money in your bank account will be frozen.
- Not being able to work in a certain profession, be a company director, or do business.
- The DGI will set a certain percentage of your monthly income to repay your debt.
What Happens If Your Property Is About To Be Foreclosed
1) First notice
Once you’ve not made payment for 4 consecutive months, the bank will send a letter of warning.
What can you do? Try asking the bank to reschedule your loan for an extension of loan tenure, or restructure the loan to one that matches your cash flow situation. To better prepare for what’s to come, get details on their procedure for foreclosure.
2) Follow-up notice
Bank serves a follow-up warning letter in the second month of missed payment. Late payment interest will be charged, and you could be charged a higher interest rate.
What can you do? Negotiate with the bank to stop the foreclosure process. The bank might also be open to discussing new payment arrangements, as mentioned in point 1.
3) Payment request
From the third month onward, the bank’s lawyers will send a Letter of Demand (LOD), requesting you to pay the remainder of arrears (money that is owed) within 14 days.
What can you do? Clear the arrears. If you’ve done that and still receive warning notices, contact the bank.
4) Facility withdrawal
If you fail to clear the arrears, you’ll receive a Letter of Recall (LOR)/Facility Withdrawal, requesting you to pay the full outstanding loan amount within 14 days.
What can you do? Make the full payment within a month from the date that the Form 16D (Default Notice) was served to you. The bank must send the Form 16D to you personally. Leaving it in your mailbox, or passing it to another person, invalidates any foreclosure proceedings.
5) Court proceedings
In the sixth or seventh month, you will be called to appear in court, and the proceedings will depend on the property type.
What can you do? You can defend yourself, or appoint a lawyer to defend you.
6) Order for Sale
To recover the loan amount, the bank will apply to the High Court or Land Office for an ‘Order for Sale’ to sell the property that is charged to the bank by public auction.
An auctioneer will be appointed, and a real estate appraiser will be engaged to set the auction reserve price. The final figure will be based on the current market price and the amount of outstanding loan.
What can you do? You can challenge the valuation report a.k.a. the market value defined by the appraiser.
Upon sale, the purchaser (new owner) will pay the mandatorily required deposit, and settle the remaining amount within the stipulated number of days.
Proceeds from the auction will go to the bank to offset the outstanding loan amount that the defaulter owes. Any surplus will go to the defaulter.
If the final selling price doesn’t cover the outstanding loan amount, the defaulter will need to pay out-of-pocket.
Some Possible Solutions Before Defaulting on Home Loans
6 Proactive Measures To Prevent Defaulting On Your Home Loan
- Before purchasing a property, make sure you’re able to pay the loan and have sufficient extra funds.
- Add a monthly reminder on your phone so that you make your repayments on time, every month.
- Communicate early and clearly with your bank to restructure or reschedule your loan if you’re facing cashflow issues.
- Update your address with the bank to ensure that you receive important letters, and can take the necessary actions.
- Reduce as much expenses as you can.
- Sell the property instead of facing foreclosure and bankruptcy.
3 Financial Habits Every Property Loan Borrower Should Possess
Mortgage specialist and founder of Smart Choice Solution Sdn Bhd, Andrew Hooi, shares good habits that borrowers should have.
1) Maintain a good credit score – Plan ahead before applying for a loan. Get your CCRIS report, consult with the banker or financial advisor to calculate your current Debt Service Ratio (DSR) and eligible loan amount first, instead of submitting your loan application directly to the bank.
This is because the bank keeps your rejection record in their system from 3 to 12 months, and your loan application isn’t likely to be approved.
2) Establish other sources of income – If a borrower has insufficient income, source for more income or get a quality co-borrower.
3) Settle certain facilities – Unsecured loan facilities such as personal loans, cash on call, and quick cash will affect a borrower’s score. Try not to have such loans, or settle those facilities.
If you’re having trouble making payments, you could also reach out to professional financial advisers like Smart Choice Solution for further advice and solutions.
- The pros and cons of refinancing your home
- How To Pay Off Home Loan Faster In Malaysia? Here’s 5 Ways To Do It!
- What to do if your property documents go missing?
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