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.