Malaysian developers to offer home loans
November 18, 2016 / By
Housing developers in Malaysia can now offer loans to purchasers of their own housing product.
The concept, announced by Minister Tan Sri Noh Omar in September, is not new since the Moneylenders Act 1951 lawfully allows parties other than financial institutions to provide loans. Noh Omar captured news headlines recently with his vocal policy support for developers to act as moneylenders, allowing home buyers without end-financing to apply for loans from the developer.
The Minister says the move is a win-win situation to assist the purchaser to enter home ownership as well as being a catalyst to spur property transactions. According to the National Property Information Centre data, 13,438 residential units launched in 2Q16 remain unsold, compared with only 9,840 in the same quarter a year ago.
The loan rejection rate for residential properties in August was a high 58%; a trend seen since mid-2015. Developers blame the high rejection rates on Bank Negara Malaysia because of its prudent lending regulations to curb rising household debt.
Under this recently announced initiative, developers may offer loans with a ceiling interest rate of 12% with collateral and a maximum of 18% without collateral. However, we ask – can purchasers who do not qualify for a loan with a commercial bank rate of 4-8% afford 18%, a rate comparable to credit card charges?
Developers are also allowed to top up the loan to the full price of the house. This compares with a commercial bank, which can only provide a loan for 70-80% of the total price. A modest apartment of MYR 500,000 (US$120,000) requires the purchaser to find up to an additional MYR 150,000. This is a big sum for many households, given that the median household income of a Malaysian residing in Selangor state is about MYR 6,200 per month. The new rule allows developers to provide loans to bridge this gap. This is a potentially win-win situation, as the developer sells the project more expeditiously and the purchaser gets full financing.
Sunway Mont Residence is the only project that has guaranteed loans of up to 88% with zero progress payments. The developer has offered loans with an interest rate of 5.75%. The response has been overwhelming, with an 80% take-up rate for the residential project over a weekend promotional period.
No other developers have so far indicated that they would provide loans. Several developers have sought instead to encourage sales by allowing the purchaser to reserve a unit with a deposit, with no further payments necessary until full completion of the project.
We are reminded of the Developers Interest Bearing Scheme (DIBS), introduced during the global financial crisis of 2008. DIBS allowed the purchaser to service loan interest throughout the construction period. A 0% payment on interest induced sales while developers marked up the sales price to compensate for absorbing interest payments.
The sharp increase in speculation in residential properties caught the authorities’ attention and the practice was banned in Budget 2014. Will the Minister’s statement mean that the authorities will be more lenient this time and allow developers not to collect any payments until full completion of the project?
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