The situation of home loans right now
According to Real Estate and Housing Developers’ Association Malaysia (Rehda), more than 50% of the loan applications for affordable housing projects were rejected in 2nd half of 2015. Fast forward to January this year, the rejection rate for overall mortgage application was registered as high as 60%. While underwhelming economic condition is one big issue, many loan applications fell through because of numerous reasons on a case by case basis:
(1) Substandard credit history – CCRIS, CTOS
(2) Insufficient buyers’ income, which can also be attributed to high debt obligations
(3) Low margin of financing – many banks only offer up to 80% financing nowadays
In light of the financing gap, developers have constantly lobbied the government for reintroduction of Developer Interest Bearing Scheme (DIBS). To recap, DIBS was a scheme where developers absorbed the buyers’ home loan interest payment during construction period. It was, however, abolished in 2014 because of massive speculation.
Having said that, the scheme being discussed within the parliament today is to allow developers to become a money lender and to give loans to buyers in approved projects, though at a much higher interest rate (up to 12 percent with collateral and up to 18 percent without collateral). Also, Bank Negara is proposing to extend loan repayment period from 35 years to 40 years.
Still, many only see these as sweeteners for developers to launch even more “innovative“ plans to attract buyers. The Sarawak government, for example, was quick to announce that the state will not allow housing developers to give loans to homebuyers. In fact, the root of the problem lies in the fact that nowadays loans are out of reach for the common people.
When banks are giving impression of rejecting more than approving loan applications for affordable housing, people especially those who successfully balloted for their desired affordable homes, are becoming to question what purpose those affordable housing projects even serve. This leads us to another problem within the balloting process for affordable housing projects.
What’s wrong with the balloting process for affordable housing?
In the current balloting process, some have spotted warning sign of inefficiencies as it is run by different parties who are not in mood for collaboration. Upon registration, homebuyers would wait for the start of open balloting process for houses that meet their criteria. In the meantime, PR1MA will verify the eligibility of the buyers according to a general rule. Then, the name list of the successful applicants will be passed on to developers who will carry on with the house purchasing procedures. It is at this point of time when developers start to find out some of the winners of the ballot do not qualify to get loans from the banks. Thus, it has become all too clear that the Sales and Purchase Agreement (SPA) cannot be signed.
In this scenario, you may be forgiven to think that people were given a false hope when they won the ballot. Also, this is not unusual if we take into account the substantial demand for affordable housing. Thanks to stubbornly high prices that make properties in Malaysia become seriously unaffordable, the demand for affordable housing has continue to creep even higher each year such that there is considerably large mismatch in supply and demand.
Furthermore, if you want to find another victim under strict lending conditions, look no further than those property developers whose cash got locked in for the projects and thus are in need of property sales to sustain its operating cycle. Not to mention, the profits developers can potentially get from the affordable housing projects are quite low compared to traditional projects.
To recap, when a property developer buys a land, our government may enforce the company to build a certain percentage of affordable houses which prices will be capped at RM400,000. With the high land prices and development costs, developers will not be getting equal margin as in traditional projects. Obviously, the only way now to earn enough profit is to go by volume. What do you think developers feel when they start to cross out buyers’ names after knowing that they cannot get loans? Why should we even expect developers to not be fended off by the rule of building affordable housing when it is so hard to sell?
In a nutshell, the ballot process is flawed because the winners of the ballot may not necessarily get the houses. This results in huge inefficiency issues as the already lengthy process may not even produce transactions at all.
Can we resolve this?
Without much restructuring, the efficiency of the whole application process can be elevated by shifting one step: loan screening before the application for the available projects. Nowadays, there are technologies like Loanstreet Partners that can solve this issue and make the ballotting and screening process with multiple bank's smoother and easier. By doing so, applicants will know their eligibility for loans for a particular project and even their purchase price limit after going through the loan screening process.
With that, developers can worry less about the outcome of loan application of the winners of the ballot. From the banks’ perspective, it makes sense because they will not incur additional costs as no extra step is needed. Documentations can be filled and collected before the application process. Once approved, PR1MA who conducts the ballot can work together with banks to release the ballot results along with loan details.
This is not suggested without evidence of feasibility. In Singapore, Housing & Development Board (HDB) flats’ buyers are required to undergo loan assessment from HDB or banks before submitting application for buying HDB flats. Once the outcome of the ballot is released, successful applicants who are invited to select flats will have to immediately present HDB loan eligibility (HLE) letter by HDB or Letter of Offer by banks to prove that they are eligible for loans.
In essence, this procedure prevents those who are not eligible for loans from applying. Hence, the whole process is way more efficient than that in Malaysia where PR1MA keeps seeing successful applicants being turned down by banks.
Malaysians are seeing many loan applications for affordable housing rejected by banks because of the tight lending condition. Because of a flaw within the application process, people who are not eligible for loans would still be able to participate in the balloting process. To resolve this issue, PR1MA can enforce applicants to go through loan assessment before submitting their applications for PR1MA homes.