Debunking misconceptions on “Responsible Lending Policies” By Michael Yeoh MORE CHANGES: Michael gives us the lowdown on lending curbs The last two years have seen tremendous changes in the lending policies by Bank Negara Malaysia (BNM). The Responsible Lending Policies has been introduced in stages to curb property speculation and the increase in household debts. If you were to compare 10 years ago and now, you will see property players in the industry have increased by manifold. Many people have acknowledged that property is considered the lowest risk investment but its yield has one of the highest returns. Since the 1997-98 Asian Financial Crisis, many have switched to property investment to diversify their risk. It is not difficult nowadays to spot millionaires who have made their money through property investment. As the buying frenzy gets more intense in recent years and more people get into the game, this is where property players especially the new ones have to be extra careful. Buying and borrowing from the banks is very different as compared to 10 years ago. You need to keep yourself updated with the latest trends and information. Gone are the days when you just buy a property and then go to the bank for borrowing. You will need to do your own research these days. I have always stressed that getting into the property game requires four important elements which complement each other. 1. A property expert to share with you the best place to invest; 2. A mortgage financing expert to plan your mortgage; 3. A lawyer to protect your investment; and 4. A tax expert to minimise your tax and maximise your profits. If you miss one of the elements above, then you will be vulnerable to higher risk in your investments. To prove my point, recently I received an email from one of my readers: It is not just about buying property alone but you need to do proper financial planning. Before you make a decision to purchase a property, make sure you can afford at least six months to a year of installments in case you cannot sell or rent the property upon completion. 70% cap on loan margin When BNM introduced the 70 per cent loan cap on the third residential properties onwards, we as Malaysians are always very innovative and were trying to find a way around the policy. In the initial few months following the introduction, many property investors found a way around it by registering a ‘Sdn Bhd’ company (private limited company) and using it to borrow from the banks. The law then stated that the rule only applied for individuals and companies were not affected by the ruling. True enough banks still could lend up to 90 per cent of the property value regardless of how many properties the company owns. As fast as market reacts to the new ruling, BNM likewise also responds very fast to plug the loophole. One fine day, they sent a directive to all banks to reduce the loan margin to 60 per cent for companies buying residential properties regardless of the number of properties owned. Since last year, many have also taken advantage of the banking system by sending multiple property loans to different banks for approval in order to get 90 per cent margin for each of the loan. Even today, many have been practising this strategy to get higher margins in order to buy many properties at the same time. Property buyers beware Markets do change over time as banks and BNM will eventually catch up with the loophole. Banks will start to check the CCRIS (Central Credit Reference Information System) record before a loan is disbursed. You might escape during the purchase of the first property but the subsequent release will be affected as the bank has the right to reduce the margin of finance under the terms in the Letter of Offer. Imagine if you were to buy four properties under this strategy. For the third property onwards, you need to fork out an additional 20 per cent to cover your shortfall when the loan is reduced to 70 per cent margin. Imagine for each property, your shortfall is RM100K. If you want to buy three properties, you need an additional of RM300k to top up the loan. For those who are using this strategy, the risk now is much higher than a year ago. Another strategy widely used by property investors is to apply for a loan from MBSB (Malaysia Building Society Berhad). As MBSB does not fall under the BNM ruling, property buyers can get 90 per cent margin of finance regardless of the number of properties purchased. Well, the tide has changed now, the latest information I have is MBSB can no longer give 90 per cent anymore, and has to follow the 70 per cent cap set by BNM. One of my students happened to get the last 90 per cent loan approved from the financial institution. Nett income approval In January 2012, again BNM imposed another guideline on approval which is based on nett income instead of gross income. At the point of implementation, there was a lot of news on the effect on this new ruling which will greatly affect the loan approval for many property investors. If you know the lending industry well and have done thorough research, then you will not be alarmed by this implementation. I think I am the very few people or the only person in the industry who says this new rule actually has not affected the loan approval. Yes, you heard me right and I always say this in all of my seminars. The banks actually have adjusted to the new rule by adjusting their Debt to Income Ratio (DTI) from 60 to as high as 85 per cent. Please take note that different banks have different DTI ratio on approval. Ultimately, what is more important to the banks is the borrowers’ capacity to repay the installments promptly. Latest lending curb by BNM In July this year, in view of the increasing household debt to Gross Domestic Product (GDP) from 70 per cent in 2009 to 83 per cent as of March this year, again BNM introduced another set of lending curbs: • Maximum tenure of 10 years for personal financing • Maximum tenure of 35 years for residential & non-residential • Prohibition on granting pre-approved personal financing products I would say this implementation is timely looking at the increasing household debt. If BNM did not introduce the Responsible Lending Policies, we will be looking at a possible scenario of a sub-prime crisis in Malaysia like what the United States has experienced. By saying this, I still feel that there is room for improvement. Personal Financing tenure should be reduced to five years in order to be effective as most banks are already giving a maximum of 10 years tenure. Capping the loan tenure to 35 years may have little impact. Not many banks are offering loan tenure beyond 30 years anyway. On the prohibition in the granting of pre-approved personal financing products, sad to say, the banks are not actually implementing this as I still get a call from a bank last week giving a pre-approved personal loan based on my credit card limit. The ease in getting personal financing products such as credit cards or personal loans is the biggest contributor to the high household debt today. DIBS curb - is it coming? I am quite confident that this will be implemented sooner or later. I think the impact will be minimal and the industry will adjust to the curb in a short period. Nowadays, you can see that not many developers are introducing this scheme and instead they are giving upfront discounts. So there is nothing much to worry about this. I have always mentioned in my seminars that after GE13, there will be more policies introduced to curb lending. We have already seen some being introduced and I expect more to come in the next few months especially during the 2014 Budget announcement in October this year. My advice to all of you is to keep yourself updated by reading more articles or attending seminars given by top property industry experts. Read more: Debunking misconceptions on “Responsible Lending Policies” - RED - New Straits Times nst.my/red/debunking-misconceptions-on-responsible-lending-policies-1.342309#ixzz2d2J7rKPF
Posted on: Mon, 26 Aug 2013 01:57:09 +0000
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