THE NATIONAL House Buyers Association (HBA) refers to the statements from the Real Estate and Housing Developers’ Association Malaysia (Rehda) that the recent proposal from the Minister of Urban Wellbeing, Housing and Local Government, Tan Sri Noh Omar for eligible property developers to be given a moneylender license is only for the property developers to lend money to buyers as a “bridge” for downpayment on their home purchases and not as a full loan as speculated claiming that most bank loans today will only give margin of financing of 80% compared with 90% previously.
HBA reaffirms our earlier view that despite the clarification from Rehda that developers lend money to buyers as a “bridge” for down payment for houses priced at RM500,000 and below, this proposal is still detrimental to the buyers and property industry at large. We explain the reasons for our stand below.
Valid reason for reduction in margin of financing
While on the surface it may seem that the developer is trying to help the house buyer to purchase his or her dream home, there are valid reasons that the bank did not give the full 90% margin of financing, which are either:
> the property is overvalued, or
> the borrower is not credit worthy; either because his salary is too low or he already has too many existing credit commitments, or a combination of both reasons.
If the banks are of the opinion that the house buyer/borrower will not be able to service the full loan or the property is overvalued, the banks will reduce the loan amount in order to reduce their risk and loan amount accordingly. Banks are in the business of giving loans and will want to maximise the loan disbursement whenever possible. If the house buyer is only getting a margin of financing of 80% instead of 90%, the house buyer must then take this as a message that the property that he wishes to buy is beyond his income and he should look towards something more affordable.
Higher monthly interest and repayments
The loan that Rehda is referring to in the banking circle is actually not a “bridging loan” but a “differential sum loan” which is the difference between the end financing and purchase price of the property less the traditional 10% downpayment. This “differential sum loan” is typically not secured as the property will be secured for the end-financing loan and according to the statement from the Housing Minister, developers are allowed to charge up to 18% per annum for unsecured loans. This means that the house buyer will have to repay much higher monthly loan repayments in the form of the end-financing and the “differential sum loan”.
To illustrate, ABC wants to purchase a property worth RM500,000 from the developer and after paying the 10% down payment, the financing required is RM450,000 or 90% margin of financing. The monthly installment that ABC would need to pay is tabled (see ABC’s purchase).
If ABC gets his 90% loan, there is no problem but in the event that ABC only gets 80% loan, then ABC must pay the “differential sum” of RM50,000 or abort his purchase. So, in comes the developer with the “differential sum loan” which appears to help ABC in buying his dream home.
The interest rates for this differential sum loan has yet to be announced although it is capped at, “not exceeding 18%”, under the Money Lenders Act. Interest under the Money Lenders Act is also calculated upfront, unlike a housing loan that is calculated on a reducing balance basis. Hence, the effective interest rate for loans under the Money Lenders Act is much higher.
Bank Negara has also set a cap of 10 years for all personal financing schemes. We have calculated a few scenarios of what is the monthly repayment required for a RM50,000 loan under this differential sum loan.
The combined loan repayment of the housing loan and differential sum loan is much higher and all prospective house buyers must take note before entering into such an arrangement.
Higher risk of default and bankruptcy
As we can see from the above table, by taking the differential sum loan and end-financing together, the house buyer is put into a much higher financial stress as the combined loan repayments are much higher compared with if the house buyer getting a 90% margin of financing.
Hence, house buyer who takes part in this differential sum loan scheme could default in the future as they will not be able to keep up with the financial obligations in the event of any unforeseen emergencies. As the differential loan sum is not secured against the property, the licensed moneylender cum developer can sue the house buyer for bankruptcy and seize all the house buyers’ unencumbered assets.
Check loan eligibility first
All aspiring house buyers are advised to check their loan eligibility with the banks before paying any “booking fee” or down payment with the developer. The banks will be able to advise the borrower whether he/she will be eligible for a 90% margin of financing based on the risk and credit profile of the borrower and the location of the property that the borrower wishes to purchase.
House buyers must never be pressured to buy and pay any monies to any developer before checking, or risk losing the “booking fee” or down payment if they subsequently abort the transaction due to their inability to secure the full 90% margin of financing.
Rent first – buy later
Another alternative is for aspiring house buyers to put off their house purchase until the economic situation is better or their own credit profile improves. There is no shame in renting a property especially during the current economic uncertainty.
These aspiring house buyers can use this opportunity to hunt for good rental bargains and conserve their “war chest”. As more aspiring buyers put off their purchase and rent, developers may even reduce prices to dispose of the unsold units.
Inherit properties not loans
Malaysia is facing an impending housing crisis and a large segment of our population, from the lower- to the middle-income segment and especially the younger generation are finding it very difficult to afford their own homes.
Khazanah Research, a government-linked research body had released a report Making Housing Affordable.
That report shows that average house prices in Malaysia are more than four times the median income, which makes such properties “seriously unaffordable”.
This “differential loan scheme” will only benefit the moneylender cum developers as it will allow these developers to unload their products/properties on unsuspecting house buyers and many of these house buyers will face financial difficulty in the future from having to service the astronomical interest rates of the differential sum loan
Hence, it is prudent for all house buyers to do all the necessary checks before buying a property. Buy a property which is within your income and means and always save for a rainy day. HBA want our children to inherit our properties and not our loans.
- Chang Kim Loong is the secretary-general of the National House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation manned by volunteers. He is also the NGO councillor at the Subang Jaya Municipality Council.