Bank Negara's measures to ensure financial stability.

By ANGIE NG 

HOUSING loans or mortgages offered by banks to house buyers present a lifeline to eligible buyers to realise their home ownership quest. It is after all most people’s dream to own at least a house as it is a sign that a person has made good in life.

In underwriting mortgage applications, financial institutions have to adhere to the lending guidelines set by Bank Negara that have been put in place to ensure stability in the financial system.

In November 2013, the central bank introduced stricter mortgage underwriting guidelines to rein in speculative property buying that has caused house prices to jump by about 20% to 30% within a period of less than three years.

The broad cooling measures that have been introduced by Bank Negara for the property sector are the 70% loan-to-value (LTV) cap on a borrower’s third and subsequent mortgage facility, lowering of the maximum tenure for property loans to 35 years from 45 years, the abolition of developer interest bearing sceheme (DIBS), raising of the real property gains tax (RPGT) and increasing the cap on foreigners buying properties to RM1mil from RM500,000.

The more punitive RPGT rates imposed are 30% for profits made from properties disposed of within the first three years of purchase. For disposals within the third to fourth year, the rates are 20% and fourth to fifth year, 15% respectively.

Bank Negara said the contributing factor to the rapid increase in house prices over the past few years was the use of marketing tools by developers that included the DIBS. The low RPGT rates also contributed to speculative buying that caused prices to rise.

The DIBS not only artificially inflated property prices, but also encouraged speculators to enter the property market with very small capital outlays, the central bank revealed.

In its observation on loans to the property market, Bank Negara, in its Annual Report 2015, said the macroprudential and fiscal measures that were in place, such as the LTV measures, responsible lending guidelines, higher RPGT rates and the prohibition of DIBS remained instrumental in maintaining the long-term sustainability of the property market and mitigating potential risks to financial stability.

Bank Negara’s Financial Stability and Payment Systems Report 2015 showed that the total exposure of financial institutions to the property market amounted to RM733bil, with about 90% of the exposure related to end-financing for the purchase of residential and non-residential properties.

The report pointed out that the annual growth of borrowers with at least three outstanding housing loans – a proxy for speculative buyers – was maintained at a low and stable rate of 3.1%, down from the much higher rate of increase of 15.8% last observed in 2010.

Financial institutions include banks, development and selected non-bank financial institutions, insurers and takaful operators.

Risk from the residential property segment has been contained given the moderation in aggregate house price growth. This was a result of the various pre-emptive macroprudential and fiscal measures that were implemented since 2010, as well as continued initiatives to increase the supply of affordable housing.

Developers join the bandwagon
Developers have voiced their concerns that housing loan approval rate has dropped sharply to below 40% since the implementation of stricter mortgage loan guidelines by Bank Negara and that some genuine house buyers have failed to get bank financing. They blamed the stricter lending guidelines by Bank Negara for buyers not being able to obtain the financing needed to proceed with their home purchases.

The second half 2015 Property Industry Survey by the Real Estate and Housing Developers Association (Rehda) conducted in 12 states and participated by 159 respondents revealed that more than three quarter of the developers expect to have sales of below 50% in the first six months of their project launch. They cited lack of end-financing and loan rejections as the main reasons for the unsold units.

In the face of sluggish market and weak economy, developers have came up with various sales campaigns and financing schemes to promote property sales.

The house buying packages with offers of incentitves are to assist buyers pursue their home purchase plan.

On the types of mortgage loans available, a Loanstreet spokesperson shared that at the most basic level, loan packages offered by banks do not differ too widely from each other, although there are some degree of product enhancement and differentiation to suit the current market.

For example, some banks offer a certain percentage of cash back (according to property location) to sweeten the deal, while others offer limited time zero moving cost packages (loan legal fees absorbed by banks) with attractive interest rates and higher LTV of up to 95% with insurance and loan legal fees financed inside the loan, as opposed to the market average of 90% to help buyers reduce entry cost of purchasing property.

He said for property priced above RM500,000, a flexi home loan package that is bundled up with high LTV, separated insurance account and competitive interest rate is ideal. The separated insurance account is very convenient if the buyer wishes to settle insurance earlier.

“For investment property of not more than six years, we recommend Zero Entry Cost (ZEC) housing loan, where banks absorb the legal fees, stamp duty and valuation fees. The interest rate is a bit higher (starting at 4.75%), but over five years, the total interest expense that the borrower has to pay is actually the same as the loan legal fees had he chosen a conventional loan package. The main difference is that by not paying an upfront legal fee with the ZEC package, cash for other purposes is available,” he added.

Before signing up for a mortgage loan, potential borrowers should shop around and compare the repayment terms and interest rates.

They can log on to the Loanstreet website at loanstreet.com.my that helps potential lenders compare and apply for loans online, free of charge.

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