Curbs to Interest Capitalization Scheme
Interest Capitalization Scheme (ICS) is a type of scheme where interest costs are capitalized (E.g. Built into the sale price) instead of being paid by the borrower as they are incurred. The most popular type of ICS in Malaysia is the DIBS where during the construction period, the developer (instead of buyer) pays for any interest incurred on the mortgage loan until construction is completed.
To offer DIBS, developers include the cost of interest payments into their launch prices. As a result, the future cost of owning the property (retail price + interest costs) becomes the advertised retail price, which is higher than would have been without DIBS. Since property prices are set at the extremes, this creates upward pressure on the prices of surrounding properties.
Aside from DIBS, another type of ICS is the Developer Interest Rebate Scheme (DIRS). In this scheme, instead of paying the interest payments directly to the banks, the developer pays the money to the borrower as it is incurred instead – A rebate of sorts.
Moving into 2014, BNM will disallow banks from offering financing to any projects that offer any form of Interest Capitalization Schemes.
Loan-to-Value (LTV) Ratio based on Net Selling Price
Banks typically base their Margin of Finance (a.k.a. LTV) calculations based on the price in the Sale & Purchase Agreement (SPA). In practice, the price stated in the SPA is usually the gross sale price before any special discounts / rebates are given. In most cases, it also includes the cost of any freebies thrown in by the developer (E.g. Free home appliances).
The effect of these rebates / discounts is that the entry cost for owning a property is reduced artificially. Buyers can own a home for little money down and leverage at a much higher margin of finance than otherwise possible. Additionally, there is a distortionary effect when advertised retail prices are not the same as the true selling price.
Moving forward, BNM has mandated that LTV calculation for all mortgage financing must be based on the net selling price of instead of the gross price. This is in conjunction with another separate guideline for developers in which they must fully disclose any rebates / discounts and add-ons they are offering with a project.
An example calculation showing the differences of the newest LTV ruling:
| SPA Price: RM600,000 Rebates Offered: 7% Total Rebate Value: RM42,000 Net Price: RM558,000 LTV Ratio: 90% |
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| Calculation Before Guideline | Calculation After Guideline | |
| Loan Amount | SPA Price x LTV = RM600,000 x 90% = RM540,000 |
Net Price x LTV = RM558,000 x 90% = RM502,200 |
| Down Payment | RM18,000 | RM55,800 |
Conclusion
BNM’s latest measures are aimed at reducing speculative demand in properties. However, if you’re a genuine home buyer, these measures should not deter you from making a purchase. Always remember to use Loanstreet’s Home Loan Comparison tool to apply for your housing loan once you have made the purchase.
Image source: http://seijieiga.blogspot.com/2013/01/property-cooling-measures.html
