BLR for the past 20 years in Malaysia

          Interest rate is always one of the most crucial factors when it comes to property financing. The chart below shows the Base Lending Rate (BLR) for the past 20 years. Unlike what most people have in mind, BLR is not set by Bank Negara Malaysia. And some banks might have higher BLR than others.

          Overnight Policy Rate (OPR) is set by Bank Negara Malaysia. To make the long story short, OPR is the interest rate one bank pays to another bank for overnight lending. BLR is pegged to OPR by a similar quantum. So, when OPR is adjusted, it will bring a chain effect to BLR, FD rates, Forex rates, short and long term interest rate, the amount of money and credit and other economic factors.

*Data extracted from blr.my

Net Selling Price & Loan To Value. Why you should care!

With the alarming level of Household Debt to GDP ratio standing at 83 percent, the banning of Developer Interest Bearing Scheme (DIBS) and rising of Real Property Gain Tax (RPGT) didn't come unexpected by the public during the unveiling of Budget 2014 by the prime minister. And that's after the measures taken by the Bank Negara Malaysia (BNM) to limit the tenure of housing loan to maximum 35 years and refinancing with cash out or top-up loan to 10 years.

In less than a month time, BNM issued a new circular, "Measures to Promote Sustainability of the Property Market", on 15th Nov 2013. It calls the financial institutions to use Net Selling Price to determine Loan-To-Value (LTV) ratio or more commonly known as Margin of Financing (MOF). So far, this is the boldest and sternest action taken by BNM to curb the potential uptick of household debt.

If any of you thought DIBS was the sole culprit of rising home prices, then you are probably making a mistake. The usage of Gross Selling Price by the financial institutions for MOF is the main driver behind the booming of primary market. Both genuine home buyers and investors have benefited from it although their objectives differ from each other.

  

Old Measure (Borrowing based on Gross Selling Price)
Gross Selling Price	RM500K
Margin of Financing	90% or RM450K
Cash Rebate	9% or RM45K
Down Payment	1% or RM5K

New Measure (Borrowing based on Net Selling Price)
Gross Selling Price	RM500K
Cash Rebate	9%
Net Selling Price	RM455K
Margin of Financing	90% or RM409.5K
Down Payment	10% or RM45.5K

Under the old measure, young adults with a net monthly income of RM5K could easily snap up an under construction property with a saving of RM5K (1 month salary!). They will only be servicing the interest during the construction period. Nonetheless, the new measure will require them to have a saving of 9.1 months for it!

On the other hand, investors’ goal is always about the return on investment (ROI). Assuming the expected market price of the property goes up to RM600K after completion. The gross profit would be RM100K. Under the old measure, the ROI (excluding interest and other fees) is a whopping 20 times (RM100K/RM5K)!! However, it could only up to 2.19 times under the new measure.

                The incentive of buying property from the primary market is wearing off. This new radical measure will indisputably decelerate the growth of the primary market and the huge spike of the property prices could come to an end.  The only untouched portion for household debt is hire purchase or passenger car loan. It is definitely not a surprise that the auto industry becomes the next target of BNM.  

Real Property Gain Tax (RPGT) for 2014

Disposal Period	RPGT Rates
	Individual	Company	Foreigner
Disposed within 3 years	30%	30%	30%
Disposed in 4th year	20%	20%	30%
Disposed in 5th year	15%	15%	30%
Disposed in 6th and subsequent years	0%	5%	5%

It's official! The vanish of DIBS from the residential property market!

          For those of you who wanted to take up a residential property with Developer Interest Bearing Scheme (DIBS) before year end, you will be disappointed by the following. Jabatan Perumahan Negera (JPN) has issued a statement pertaining to banning of interest capitalization scheme or any similar scheme including DIBS from 15 November 2013.

          It has always been intriguing to see how the housing developers came up with some creative gimmicks to boost their sales. To me, "interest capitalization" from the statement somehow restricted JPN's determination to curb housing prices. And there are definitely other ways to get around it. 

          The housing developers are always blamed for the rise of housing prices. People seem to forget that it takes two to tango. It could not be done without the collaboration of financial institutions and speculators. Last but not least, real estate no doubt is a good hedge against inflation, nonetheless, like other alternative investments, it will not go north forever.

http://ehome.kpkt.gov.my/main.php?Content=articles&ArticleID=73

Thinking of buying a property in Malaysia but unsure about your entitlement for housing loan?

I believe that is the question playing in most of the minds of those keen on owning properties these days. Rest assured that the following unveiling of the myth for the housing loan application is simple and straight forward.

                The financial institutions need to gauge the repayment capability of the applicant based on the income documents. The most commonly used measure is Debt Service Ratio (DSR) which equates to Total Monthly Debt Obligation over Total Monthly Net Income. Banks are more inclined to approve loans of applicants with DSR less than 65% (inclusive of the loan applied) for an obvious reason (less risk!). The maximum permissible DSR in some financial institutions could go up to 90% depending on the net income of applicant. Besides, Asset to Debt Ratio (ADR) is a less popular measure to gauge repayment capability if compared to DSR. This measure is more confined to high net worth individuals, namely, the individual with more than RM1 million net worth.

                Loan To Value (LTV) could be a deciding factor when it comes to the purchase of property.  It is also known as margin of financing (MOF), the amount of loan which financial institution would lend to part finance one’s proffered property. All Malaysians are entitled to MOF up to 90 percent for the first two housing loans.  Only 70 percent MOF would be allowed for the third one (and onwards) due to the restriction set by Bank Negara. Nonetheless, financial institutions have absolute discretion when it comes to MOF. Individuals without credit record on Central Credit Reference Information System (CCRIS), breaching of the DSR, defaulting on payment, and others could be the few reasons behind the reduction of MOF.

                Due to the recent amendment on the allowable tenure for housing loan by Bank Negara, the maximum tenure is 35 years. The tenure of the housing loan will determine the monthly debt obligation of the individual. This could also be one of the deciding factors for the loan approval. Applicant has to be of at least 18 years of age and gainfully employed for at least 6 months.

                Interest rate is one of the biggest concerns besides the financial institution’s approval on loan. There are two types of interest rates offered in Malaysia.  Most of the banks’ offers are pegged to Base Lending Rate (BLR), which is a floating rate. Its fluctuation would affect the monthly installment of the loan taken. On the other hand, non-bank financial institutions do offer fixed rate in housing loan. Generally speaking, in a low interest rate and low inflation environment, individual will benefit from floating rate. One thing for sure, fixed rate taker would sleep more soundly at night during high inflation environment as the interest rate will most likely move north gradually.

       
                Lock-in period always comes in conjunction with penalty. This normally takes place when the borrower intended to fully settle the loan taken within the first 3 to 5 years after the first disbursement of the loan. And the penalty is normally 2 to 5 percent of the loan taken. The borrower could save a big chunk of interest by doing partial prepayment to the principal borrowed. With lower outstanding principal, the interest charged by the financial institutions would be reduced.