In a bid to assist Malaysians with homeownership, there has been talk of reviewing stringent housing loan requirements imposed by banks. HBA cautions against this move and shares a few other recommendations.

The National House Buyers Association (HBA) refers to the Housing and Local Government Minister, Yg Berhormat Zuraida Kamaruddin’s statement that “stringent housing loan requirements by banks for first-time house buyers, especially youths, should be reviewed”.

Undoubtedly this is a response to Malaysia’s current ‘housing crisis’. According to Bank Negara Malaysia’s 2017 Annual Report, the median property price in Malaysia is deemed as seriously unaffordable and is beyond the reach of most Malaysians.

HBA have iterated before that there is a need to define affordable housing based on a set of criterias and and we are glad to see that the government have taken them into consideration – it was announced on 28 January 2019 that the government is in the midst of drawing up the National Affordable Housing Policy (DPMM) and that it will adhere to the following:

-Property prices to be capped at RM300,000
-Built-ups of not less than 900 sq ft
-Specifications on types of facilities and infrastructure that need to be included in the development

Affordable housing aside, and with all due respect to YB Minister, HBA is of the opinion that relaxing credit criteria for first time home buyers, especially youths, is not the right approach to resolve a housing crisis of this magnitude. Though well intended, treating the symptoms instead of the cause will not provide a long term cure for this particular ailment.

Why relaxing credit criteria is not the solution

Banks, Development Finance Institutions (DFIs) and Financial Institutions are in the business of taking deposits and giving out loans, making a profit in the process. Hence, banks will always prefer to give loans to customers who meet their loan approval criteria. However, the primary duty of banks is to safeguard the deposits of their customers. This means that banks must exercise a high duty of care before approving each and every loan and be reasonably certain that the prospective borrower is able to service their monthly loan instalments.

If banks in Malaysia are forced to relax their credit criteria for the sake of ‘National Interest’ this would be a recipe for disaster and can create a similar situation like the American sub-prime mortgage crisis in 2007, which later spiralled into the worst global financial crisis since the 1930s Great Depression. Broadly speaking, 3 interrelated factors caused this crisis:

1) Overpriced properties
2) Sluggish economy
3) Borrowers’ poor credit quality

Referencing the situation of the seriously unaffordable homes above, Malaysia has already arrived at the first factor. Furthermore, the country’s domestic economy is sluggish with high inflation and low growth, thus fulfilling the second factor. However, banks in Malaysia have still maintained a high credit quality and this has prevented the situation from deteriorating.
Based on the above, this is why relaxing credit criteria is not the solution. Borrowers with poor credit quality would struggle to pay the loan instalments while trying to maintain a minimum standard of living. At a mass scale, this may cause a domino effect and trigger a sub-prime crisis within the banking sector.

Should banks be forced to relax their lending criteria, it will further encourage housing developers to increase the selling prices of their properties, which will worsen the housing crisis. BNM has already lowered the interest rate figures of loans to a maximum of 3.5% per annum of first-time homebuyers who purchase a home not exceeding RM150,000.

HBA would instead propose a more holistic approach which calls for the participation of first time home buyers, financiers, local authorities and developers.

What are the 4 alternatives?

#1 Imposing a quota for Banks to give out statutory housing loans (SHL)
In the late 1980s, BNM made it mandatory for banks to give out statutory housing loans (SHL), which had a fixed rate, whereby the interest rate has been fixed by BNM at 7.5% for the whole loan tenure which was either 20 years or at the retirement age of 55 (at that point in time).

SHL’s were deemed less lucrative by banks but they had no choice as BNM was very stringent in setting the target(s) or quota(s) lending to SHL. These target(s) and quota(s) were given on a yearly basis by BNM and were based on numbers of houses or apartments financed under SHL. In those days, all properties below RM100,000 were classified under the category of mandatory SHL. Some finance companies were imposed with a quota of achieving a 1,000 units a year.

The moral of the story above is that the most powerful tool was the mandatory requirement set by BNM. Today, there is no such requirement/quota imposed.

#2 Exploring the possibility of EPF as financiers
Another alternative is to make Employees Provident Fund (EPF) act as Financiers to their own EPF members or contributors strictly for the ‘Affordable Housing’ category only. This will circumvent issues related to customers’ high debt service ratio, bad credit history and insufficient documentary proof of income.

HBA has highlighted this suggestion before at the dialogue on ‘Sustainable Development of Affordable Housing’ hosted by Cagamas Holdings at Sasana Kijang, Bank Negara on 4 July 2017, as well as at the Ministry of Finance’s Budget Consultation last year – but it seemed that this recommendation had fallen on deaf ears.

This financing option could be executed under the following requirements:

-EPF to provide loans (say 20-30 years tenure) to their EPF contributor who has been a member for at the least 10 working years.
-To qualify, the member’s monthly wages must be RM5,000 or below. (The cut-off point on wages could be decided by MOF). Currently, the % share of monthly wages are Employee: 11% and Employers: 13%
-The purchase should also include a lock-in period of say 10 years
Note: HBA is aware that EPF is indirectly financing huge housing loans by subscribing to Cagamas Bonds.

To ensure that there is money in the member contributor’s account in case of contingencies, EPF will buy insurance with an endowment policy and the likes of MRTA or MLTA to safeguard their interest.
Overriding premium paid through EPF contribution, thus swelling the total amount in each EPF member account because the bonuses (from insurance endowment plan) will be accumulated in said account.

The borrower cum EPF member will make pre-determined monthly instalments to EPF akin to current loan practices. There will be no issue of default as long as the member maintains his EPF account. A default could only occur when the EPF member dies or become physically incapacitated.

If an EPF member passes away, the life insurance company pays the housing loan via the MRTA and MLTA. For those who leave employment, the residual value in the EPF account is used to set-off against indebtedness. If a member is retrenched or laid off, then a moratorium period is granted for the members to seek new employment.

For those who retire at the age of 50 years, the current EPF policy will then apply. Whereas for the retirement age of 55 years, whatever amount is utilised to pay off the indebtedness. In the event there is a situation of a sub-sale, the sale proceeds will be deposited part or wholly back into the EPF account.

Therefore, we would like to suggest a full withdrawal of total EPF savings to be allowed for first-time home buyers, accompanied with strict withdrawal criteria. The full withdrawal suggestion may face certain objections from the authorities, as the proposal deviates from the ‘saving for the old age’ rule. In our opinion, a property is a better form of savings or investment that outstrip the meagre dividends from EPF payouts as well as the cash in the EPF account, especially when it is hedged against inflation.
Historically, a residential property provides capital appreciation, while having a place to call home.

The rakyat should be able to use the accumulated monies in their EPF account – it is akin to having a fixed deposit account with a Bank and at the same time, you are ‘borrowing’ a housing loan from the Bank.

HBA would like to propose a regulatory ‘Housing Sandbox’ which is similar to the FinTech Sandbox carried out by Bank Negara Malaysia. This proposed ‘Housing Sandbox’ should be spearheaded by the YB Minister, industry stakeholders, Treasury/Ministry of Finance (MOF); BNM with the assistance of actuaries and financial experts; to explore and formulate innovative and workable solutions to make affordable properties a reality.

If the idea could be perfected and implemented, it could also be expanded to other funds which hold a considerable amount of money for their shareholders, unit holders, depositors or contributors such as Pension Trust Fund Inc (KWAP), the Armed Forces Fund Board (LTAT), Lembaga Tabung Haji (LTH), Amanah Saham Bumiputra (ASB), Amanah Saham National (ASN) and the likes.

#3 Increasing the supply of affordable properties

HBA have recommended before that developers should be provided with more incentives to enable for the construction of cheaper homes, including:

-Alienating land at lower cost on condition that at least 70% of the land is used for affordable properties
-Lower conversion premiums on condition that at least 70% of the land is used for Affordable Properties
-Lower tax rates on profits arising from affordable properties
-Cost of laying the last mile of public utilities such as electricity and water, to be borne by respective utility companies (TNB, SYABAS, TELEKOM, etc) and not by housing developers.

We hope that with the reduction of ‘business costs’, the housing developers will not compromise on quality (building) for the sake of upping their profit margin. They must pass the savings by lowering the house prices correspondingly.

We hope that with the reduction of ‘cost of doing business’ the housing developers will not compromise on quality (building) and up their profit margin. They must pass the savings by lowering the house prices correspondingly.

#4 Expanding Rent-to-Own (RTO) schemes

HBA has also called for the Rent-to-Own Schemes (RTO) to be expanded to include the middle-income segment (M40). Traditionally, RTO was meant for the lower income segment or those in the urban poverty or B40 Segment in the form of public housing programmes such as People’s Housing Project (PPR) Homes.

Due to escalating house prices and rising cost of living, even the M40 with household incomes of up to RM10,000 find it challenging to buy their dream homes. By developing RTO for the M40, HBA believes that it would go a long way in helping the Rakyat to own a home. This scheme must include an option to purchase said property in the future.

A typical RTO is supposed to provide a lower entry cost to own a unit and also a lower monthly cost of ownership whereby:

-Tenant does not need to pay for the hefty 10% down payment to secure the unit.
-Legal fees and stamping duties for tenancy are typically cheaper compared to that of Loan Agreements and Sale and Purchase Agreement.
-Monthly RTO rentals should be cheaper compared with prevailing market rentals or equivalent monthly loan instalments for similar housing units.

When the financial position of the tenant is stronger, the tenant can then exercise the option to purchase the property.