By Mangalesri Chandrasekaran
The Malaysian property market is performing rather weak and slow-paced this year, as many citizens are still struggling to acquire properties. Among them are the first time home buyers who are mostly Gen Ys.
One of the major reasons contributing to the struggle is the tight lending rules set by the Bank Negara Malaysia (BNM). Moreover, the high cost of living has also deterred most from owning a home, as their earnings are deemed insufficient.
The recent data released by BNM revealed that the loan rejection rate was at an all-time high of 61.7% during the first half this year and 57.3% in the second half of the year.
It is a well-known fact that most home buyers unable to secure a mortgage funding to acquire their dream homes.
However, the Urban Well-being, Housing and Local Government Ministry came up with a solution to tackle the issue, which however created a mixed reaction from consumers, developers, as well as property and financial experts!
Developer Loan Scheme
It was revealed recently by the Urban Well-being, Housing and Local Government Minister Tan Sri Noh Omar that the developers will now be allowed to give 100% mortgage funding for homebuyers who are unable to acquire loans from the banks.
These developers will be issued a moneylender license by the Urban Well-being, Housing and Local Government Ministry under the Moneylenders Act 1951 (Amendment) 2011, where the developer can make a profit from end-financing services besides getting profit from sales.
The interest rate imposed for funding in this scheme can be up to a maximum of 12% with collateral and up to 18% without collateral. Meanwhile, the interest rate for fixed home loan by banks is set between 4.25% to 5.05%. Click here for the list of banks and the interest rate it offers.
In other words, developers can become an alternative for buyers who are unable to get mortgage loans from financial institutions.
See below to get a clear picture of the monthly instalment under the commercial bank loan and developer scheme loan:
Even though this initiative was taken to help struggling home buyers to secure a home, yet many claims that its dreadful impacts have been overlooked.
So What Say the Consumers?
After such move was announced to the public, the consumers have shown their disappointment over the issue as it will only draw major disadvantages to the public and our economy.
Many claim that the government has taken a step which instead of helping homebuyers will actually add up to their burden.
“A buyer who loans from the developer would have to serve an interest of up to 12% to 18%, which not only triple the monthly instalment of the buyer, but quadruple in certain instances,” said a frustrated citizen.
In regards to this, a representative of PropertyGuru approached few netizens for their opinion and what the consumers actually expect from the government. And the answers were:
- More affordable homes
Instead of finding an alternative for bank loans, the government should focus more on offering affordable homes. Even though there are many affordable homes initiative from the government, yet it is still insufficient or lack in terms of good locations. Hence, the shortage of affordable homes should be tackled to help the consumers secure a roof over their heads.
- Loosen the tight lending rules
The consumers would feel more secure to get a mortgage loan from the banks compared to other sources. Hence, the government should take the initiative to loosen the current tight lending rules which will allow more people to acquire loans from the bank. Other initiatives which might burden citizens with a higher interest rate should be avoided at all cost.
- Re-introduce DIBS for new buyers
The Developer Interest Bearing Scheme should be re-introduced again to help the first time home buyers acquire properties. The government stopped this initiative previously to halt speculators, however, it has also affected the new home buyers. Thus, the government should re-introduce this scheme with controls over who can enjoy such benefit. For an example, rules such as ‘an individual can use DIBS to purchase his first two homes only’ should be imposed. Such rules will benefit new home buyers, as well as prevent speculators from taking advantage out of it.
Similar to the consumers, most of the financial and property experts are against the initiative, claiming that the government are turning developers into loan sharks, encouraging higher interest rate and unregulated lending.
Amongst them are Real Estate and Housing Developers’ Association Malaysia (REHDA) which praised the government for its effort in helping home buyers. However, it further suggested that the government should reduce the interest rate as the motive should be to help the home buyers and not to burden them instead.
Rehda further noted that most home buyers are struggling to prepare the 10 to 30% down payment for the homes, and that’s where the government should focus for now. So instead of giving 100% loan to the home buyers, the developers should only be allowed to give funding for the required down payment.
Meanwhile, the CIMB Group chairman Nazir Razak noted that “unregulated lenders and subprime borrowers will increase the risk of a debt crisis. Such practice of providing loans with higher interest rates to those with poor credit history led to the 2008 global financial crisis previously.”
Similar to Nazir, the Second Finance Minister Datuk Johari Abdul Ghan also feels that the move will lead to a financial crisis. “More affordable homes should be offered and subsidies should be given to those in need, instead of finding an alternative to banks,” he added.
He further stated that the developers themselves have to secure loans from banks as to develop their projects. They usually start selling the houses prior to completion as to get funding for their developments. Hence, asking them to lend money is a wrong business move.
In addition to this, Fitch Ratings stated that the move can add the risk which associates with the rising household debts. Besides lending to households with weak financial profiles, the financial loans given by the developers will also fall outside the purview of BNM with no proper scrutiny, risk management and underwriting standards.
According to PKR Pandan MP Rafizi Ramli and DAP Damansara Utama state assemblyperson Yeo Bee Yin, this move can artificially increase the house price. Meanwhile, the National House Buyers Association (HBA) warned that this scheme may cause a property bubble.
“Allowing developers to provide housing loans could push young Malaysians down the vicious cycle of debt. There should be a reason why the applicant’s loan was rejected in the first place,” stated Khalil Adis Consultancy CEO Khalil Adis, a renowned property expert and the author of the best-selling ‘Property Buying for Gen Y’.
According to the Developers
We have not received proper feedbacks from the developers to-date. This move was encouraged by established developers and not the startup or small-timers.
According to Noh Omar, some of the developers already own the moneylender license and were offering loans for 8% interest previously.
The announcement of this initiative has created more negative feedbacks from the public and experts, as many oppose the idea.
Following this, Noh Omar announced that as for now, the developers can lend funds for the down payment which covers 10% to 30% and not allowed to lend 100% mortgage fund. In addition to this, the interest rate will be capped at 6%.
However, more studies will be conducted to improve the policy in terms of its effectiveness in helping the citizens, interest rate and repayment period and setting up clear guidelines.
In regards to this, the ministry recently held a meeting between Real Estate and Housing Developers’ Association Malaysia (Rehda), National House Buyers Association (HBA), Association of Banks Malaysia and Malaysian Licensed Money Lenders Association.
It was suggested during the meeting that the developers should not be allowed to offer loans with collateral and the interest rate should be increased to 8% from 6%, as to be fair to the developers.
Meantime, the Sarawak state government rejected this plan and come up with their own initiative to help the Sarawakians. The state government had set up Mutiara Mortgage and Credit Sdn Bhd as a fully-owned subsidiary of the Housing Development Corporation (HDC). Through this, the Sarawak government can help the lower income citizens to acquire loans to secure a home.
For now, this issue is still being highly debated and reviewed. Hence, we can’t run into any conclusion until the ministry comes up with a clear guideline and determine if this initiative will help the people.
Mangalesri Chandrasekaran, Editor at PropertyGuru, edited this story. To contact her about this or other stories email firstname.lastname@example.org