Developer Lending Is Risk Or Benefits To Buyer?

The Urban Wellbeing, Housing and Local Government Ministry announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 % and 18% on 8th September 2016.

As mentioned by Minister Tan Sri Noh Omar, the purpose of the move is intended to relief the burden to the buyers and assist Malaysians who are unable to get a full housing loan from banks or those who may only be given a partial housing loan.

“This proposal is a win-win situation for both developers and house buyers. For the developers, this end-financing facility offers a second profit centre. First, of course, from the sales (sic) of these houses and second from the proceeds of the end-financing scheme that I am proposing,” he said during his speech.

He explained that all developers will be able to apply to the ministry for a money lending license beginning today in accordance to the Moneylenders Act 1951.

However the government’s award of such licenses will be dependent on a variety of factors, especially the company’s financial standing.

He added that the scheme will not involve the central bank and will be wholly handled by the ministry.

Additionally, he said developers will have full autonomy to decide who will receive the loans as it will not be restricted to first-time home buyers, unlike the DIBS. The ministry also did not impose any restrictions on the types of properties the loans will apply to. Loans will be given out at an 18 per cent interest rate without collateral and at a 12 per cent interest rate with collateral.

Mortgage Loan From Commercial Bank VS Home Loan From Developer

Currently, the country’s national household debt to gross domestic product (GDP) ratio in 2015 stood at 89.1%, and 56.2% of the debt is due to purchase of residential and nonresidential real estate.

By allowing developers to issue loans for residential properties at a much higher interest rate may drive household indebtedness even higher. As a knock-on effect, nonperforming loans in the country will grow in tandem.

Now, there are many reasons why a property buyer does not get approval for housing loan, such as bad credit health, high debt-to-service ratio, insufficient income, to name a few. However, if your home loan is rejected and you are thinking of getting a loan from the developers, you are looking an extremely high monthly repayment due to the higher interest rate and also shorter tenure.

developer-loan-1

*Assuming the mortgage interest rate remains the same throughout the 35-year tenure.

 

Mortgages work on a reducing interest mechanism where you will continuously pay off your principal to reduce your interest payments as you progress. It’s likely that these loans from money lenders will work on a flat rate basis. That is, your interest is calculated up front and spread across the tenure resulting in a MUCH higher repayment. One that you can’t do anything about – unlike flexi payment options provided by banks where you can reduce your principal further.

However, the scheme can also be used to cover the shortfall, for those who failed to secure maximum margin of finance, which is 90% of the property purchase price. Here’s how it works:

developer-loan-2

This is a huge amount. The amount you will be paying every month takes up about 52.98% of your income, if your takehome pay is RM7,000.

In the event that you are a property investor and you are on to your third property, and as such will not be eligible for 90% loan from a commercial bank anymore. Getting the top-up loan from the developers may not be your best idea.

Here’s how much you can probably save if you opt for a personal loan instead:

developer-loan-3

However, it is important to note that by getting a personal loan, your loan will be listed in your CCRIS report, which will affect your overall debt-to-service ratio when you apply for another credit facilities in the future.

Conclusion

From the three different scenarios above, none of them point to why this is a win-win situation for both buyers and developers. This is especially detrimental to first-time home buyers.

There really is no shortcut to buying your first property. The best way to get it is still to manage your finances well to save up enough to afford one. If you decide to go on the highly leveraged road of purchasing your home, you need to ensure that you are financially capable in committing your loan obligations for the next 20 to 30 years.

Source from : imoney.com & themalaymailonline.com