30 August 2010

Downpayment to be raised to 20%?

According to real estate players, Bank Negara Malaysia (BNM) may impose a lower mortgage Loan-to-Value (LVR) ratio soon. How soon?

What is the rationale?

As reported in all dailies recently, property prices in Malaysia have been escalating since last year. No doubt, many people made handsome profit even in this down time through properties. Even though BNM has upped the base lending rate (BLR) 3 times so far this year, demand for properties seems unaffected, especially for high-end properties.

According to Bernama, Bank Negara is reported to have written to financial institutions to secure feedback on the possibility of capping the LVR for mortgages at 80% to avert the risk of a potential property bubble.

Recalled, government had imposed a 5% real property gain tax (RPGT) during Budget 2010 to curb the speculative buying of properties. So, it’s not surprise that BNM will implement the 80% cap on mortgage LVR, or at least for properties of more than RM500k.

Currently, banks can usually lend up to 90% of the house value, or up to 100% in selected cases. Moreover, developers are promoting 10/90 home loan schemes for their new launches, by the way of interest absorbing, as witnessed last year. Yes, the schemes are very successful given the property outlook last year. Because people can easily buy a house without much commitment, it may pose a danger to banks’ non-performing-loan (NPL), if house buyers default on loan payments later.

To curb speculative buying of properties, countries such as China, Hong Kong and Singapore, have already implemented progressively higher down payment ratio for buyers who own more than one property.

In my opinion, should BNM set new lending rules to cool real-estate industry, I suggest increasing minimum down payment to 20% for high-end properties only, and exclude first-time buyers for all type of properties.

  1. To minimize the impact on the industry.
  2. To support government effort to encourage home ownership.
  3. To target speculators specifically, not public at large.

Once more, only first-time buyers should be exempted from higher down payment. Because, once high-end properties’ down payment set to 20%, speculators would shift their focus to middle-class properties, which could hit the man on the street.

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