A housing loan is usually a long-term financial commitment.
However, a borrower's financial circumstances may change unexpectedly. A borrower may lose employment, experience a reduction in income, face business difficulties or accumulate other financial obligations.
When a borrower can no longer afford the monthly housing loan repayment, it is important to act early.
Ignoring the problem may cause the arrears to increase and may result in more serious consequences.
When a borrower fails to make a scheduled repayment, the account may go into arrears.
Depending on the terms of the financing agreement and the bank's policies, the borrower may incur:
Late payment charges;
Additional interest or profit;
Administrative consequences; and
Other costs.
If the arrears continue, the bank may contact the borrower and issue notices relating to the outstanding payments.
The exact procedure depends on the financing documents and applicable law.
One of the most important steps is to contact the bank as soon as the borrower realises that repayment difficulties may arise.
A borrower should not wait until the arrears have accumulated significantly.
Depending on the circumstances, the borrower may discuss possible options with the bank.
A borrower may consider discussing a rescheduling or restructuring arrangement with the bank.
This may involve changes to the repayment structure, subject to the bank's approval and applicable terms.
The purpose may be to make the repayment obligations more manageable.
However, borrowers should understand that any restructuring arrangement may affect:
The repayment period;
The total amount payable;
Interest or profit; and
Other terms of the financing.
A borrower may consider refinancing the existing housing loan.
Refinancing involves obtaining new financing to settle the existing facility.
However, refinancing is not guaranteed.
The new bank may assess:
The borrower's income;
Existing financial commitments;
Credit history;
Property value; and
Other relevant factors.
A borrower who is already experiencing serious repayment difficulties may face challenges obtaining new financing.
In some circumstances, selling the property voluntarily may be a practical option.
The sale proceeds may be used to settle the outstanding housing loan.
Before selling, the borrower should understand:
The outstanding loan amount;
The estimated market value of the property;
The selling costs;
The legal costs;
Any applicable taxes; and
Whether the sale proceeds are sufficient to settle the bank's outstanding amount.
If the property is sold for less than the amount required to settle the loan, a shortfall may arise.
Borrowers facing financial difficulties may also consider obtaining assistance from appropriate financial counselling or debt management channels.
The most suitable option depends on the borrower's overall financial situation.
A borrower should consider the full picture, including:
Credit card debt;
Personal loans;
Car loans;
Business debts; and
Other financial commitments.
If the borrower ignores the problem and the arrears continue to increase, the bank may take steps to enforce its rights under the financing documents and applicable law.
Depending on the circumstances, this may eventually involve legal proceedings and enforcement against the property.
For a property subject to a registered charge, the bank may seek to enforce its security through the applicable legal process.
The exact process depends on the nature of the security, the financing documents and applicable law.
In appropriate circumstances, a secured creditor may seek an order for sale of the charged property through the applicable legal procedure.
The purpose is generally to allow the property to be sold so that the proceeds may be applied towards the outstanding debt, subject to the applicable law and court or land authority process.
Borrowers should obtain legal advice if they receive formal legal documents or notices concerning enforcement.
A particularly important issue is whether the sale proceeds are sufficient to settle the outstanding financing.
For example:
Outstanding loan: RM500,000;
Sale proceeds: RM450,000.
There may be a shortfall of RM50,000, subject to the relevant circumstances and legal position.
Borrowers should not assume that the sale of the property automatically eliminates all outstanding obligations.
A solicitor may assist by:
Reviewing the financing documents;
Advising on the legal position;
Assisting with the sale of the property;
Coordinating redemption of the bank loan;
Reviewing legal notices; and
Advising on available legal options.
The appropriate advice depends on the borrower's circumstances.
Borrowers should take formal correspondence seriously.
If a borrower receives:
A letter of demand;
A notice of default;
Court documents; or
Other formal legal notices,
the borrower should obtain appropriate advice promptly.
Ignoring the correspondence may reduce the time available to consider possible options.
If you can no longer afford your housing loan, the most important step is to act early.
Depending on the circumstances, possible options may include discussing repayment arrangements with the bank, restructuring the financing, refinancing, selling the property or obtaining appropriate financial assistance.
The best option depends on the borrower's financial position and the terms of the financing documents.
The longer the problem is ignored, the more difficult the situation may become.
Legal Disclaimer: This article is for general information only and does not constitute legal, financial or debt-management advice. The rights and remedies of a bank and borrower depend on the relevant financing documents, security arrangements, applicable law and the specific facts of each case.
Malaysia