Bank Negara Malaysia's Lending Policies: How Do They Affect You?
Responsible lending policies by Bank Negara Malaysia (BNM) have been implemented for years now, but many are still not aware of its intricacies. Miichael Yeoh explains the policies involved in detail and how they will affect both first-time home buyers and investors.
The policies introduced by BNM are as follows:
• 70% loan margin on the third property onwards
• Nett Financing • Abolishment of Developer Interest Bearing Scheme (DIBS)
• Loan approval based on net income instead of gross income
• Loan tenure reduced to a maximum of 35 years
• A Maximum 10-year tenure for personal financing
First things first - Are these policies good or bad? Many people have divided opinions over the matter. Here is what I think - I feel that BNM’s move was timely, otherwise, Malaysia will be going through a subprime crisis. Our banks practice prudent lending policies which I think is good for the industry. However, many have called for BNM to loosen up the restrictions imposed in order to increase the percentage of loan approvals.
Let us consider an example. Assume that you are the lender and you are lending a sum of money to your friend, A. You know A is earning RM5,000 a month and have debts amounting to RM6,000. Would you lend to him? If your answer is a big “NO”, then why do you think it should be any different for banks? Banks are not charitable organisations, as they are answerable to their shareholders. If a borrower is deemed very risky, the loan application will be rejected.
Now let me explain in detail how these policies work:
70% LOAN MARGIN ON THE THIRD PROPERTY ONWARDS
This policy only affects residential properties. If the purchaser already owns 2 residential properties, the third one onwards will be at a 70% loan margin. Banks will base their decision whether to grant the loan margin to a purchaser based on his/her Central Credit Information Report (CCRIS). Here are some scenarios for an easy understanding:
• Borrower A owns property X and Y with 2 existing mortgages and intends to buy property Z. Property Z will be at a 70% margin.
• Borrower A fully owns X & Y, which are mortgage free and has one existing loan with property Z. He now intends to buy his fourth property, W. His loan margin will be 90%.
• Borrower A and B jointly owns property X and Y. If borrower A were to buy property Z, the margin of finance will be 70%. Even if in a joint ownership, as long as they are still owing a mortgage loan, co ownership is still considered as ownership. In this case, both A & B own 2 properties hence the third one (Z) will be at a 70% loan margin.
*Please take note that loan margins also depend on other factors. You might not get the full margin.
As the name suggests, nett financing means loan margins given after considering all other ‘freebies’ provided by developers. Let’s say a developer provides free SPA fees and fixtures and fittings such as kitchen cabinet, wardrobe and air conditioners as well as rebates for a property sold for say RM500,000 and these ‘extra freebies’ cost RM50,000.
Prior to this policy, a 90% financing was given or RM450,000. Now, the loan margin will be slashed to 80%, as banks have factored in the additional RM50,000 discounts. There are however banks which still lend based on gross value.
ABOLISHMENT OF DEVELOPER INTEREST BEARING SCHEME (DIBS)
Developer interest bearing scheme or known as DIBS has been abolished. Purchasers used to enjoy buying a property without having to pay progressive interest while it is still under construction. Today purchasers will need to service the interest upon the signing of the SPA.
LOAN APPROVAL BASED ON NET INCOME INSTEAD OF GROSS INCOME
Approval calculations will now be based on net income instead of gross income. Net income means income after deducting EPF, SOCSO, income tax etc. When this was introduced by BNM, many feel that this will definitely affect loan approvals. My take is this: Do not jump to conclusions. Purchasers need to know how the banks work.
Some banks have adjusted their approval conditions so it has no substantial effect. In some banks, individual’s Debt Service Ratio (DSR) was capped at 65% but after the introduction of this new scheme, they have adjusted it to 85%. Banks use DSR calculation to determine whether a borrower is eligible for a loan or not.
LOAN TENURE REDUCED TO 35 YEARS
Borrowers used to be able to borrow either up to age 75 or for a 40-year term, whichever is lower. This has been reduced to 70-years old or a 35-year term whichever is lower. Please take note that there are certain banks that give only up to age 65 or a 30-year tenure only.
PERSONAL FINANCING. MAXIMUM 10 YEARS
At a first glance, this has minimum or no impact at all. It is a norm for banks to give up to 10 years to repay a personal loan. What this actually means is this – say for example you have a loan of RM100,000 with Bank A and want refinance RM150,000 to Bank B.
There is an additional RM50,000 extra in the loan. That RM 50,000 will be considered as personal financing and the DSR will be calculated up to 10 years only.
Do you think this will impact the loan approval? The answer is a big “YES”. The borrower’s DSR will be higher because even if they were eligible for a 35-year tenure, the bank will only calculate based on 10 years.
No doubt the loan approval process is getting more stringent by the day. Nevertheless, it is not impossible matter to deal with. Purchasers will need to carry out mortgage planning before submitting their documents to the bank. This will greatly increase their approval chances.
For more of my articles please visit: www.miichaelyeoh.com
DISCLAIMER: The opinion stated in the article is solely of Miichael Yeoh, CEO & Founder of GM Training Academy PLT and is not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.