Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on September 21, 2016.

 

KUALA LUMPUR: Amid high housing loan rejection rates, access to financing continues to be a major issue for first-time buyers. And Bank Negara Malaysia (BNM) is repeatedly asked to address this issue along with the matter of house affordability.

While certain quarters have urged BNM to consider increasing housing loan tenures from the present 35 years to 40 years, the central bank and economists alike find it untenable as it would affect house buyers’ credit history.

Yesterday, BNM once again issued a statement on capping housing loan tenures at 35 years, pointing out that extending to 40 years would only serve to add to the total cost of financing without significant improvements in the affordability of one’s monthly instalment.

It cited a housing loan that is offered when the borrower is 25 years old, where a financing tenure of 35 years would extend to the retirement age of 60 years old.

Increasing the loan tenure to 40 years will only serve to add to the total cost of financing without significant improvements in the affordability of one’s monthly instalment.

In the third statement issued this year on the matter, BNM dismissed the suggestion that access to financing is the main problem confronting potential buyers of affordable houses.

“Assuming a loan of RM300,000 at an interest rate of 4.65% per year, repayable in 35 years, BNM estimated that the total cost of financing is RM608,061.73. However, the total cost of financing will increase by 8.8% or RM53,258.43 to RM661,320.16 if the loan tenure is extended to 40 years,” BNM said.

Hong Leong Investment Bank economist and research head Sia Ket Ee said measures such as extending housing loan tenures and lowering interest rates would hinge upon banks’ underwriting abilities.

The key issue is not lengthening loan tenures, rather the price of houses, he told The Edge Financial Daily.

“On a macro perspective, affordability of house prices needs to meet with people’s income level. It must be done on a gradual basis because the global outlook is challenging now, which affects income level but this is a long-term drive.

“Thus, I can understand BNM’s view of not increasing the tenure. BNM walks on a fine line in helping support economic growth while preserving stability. In terms of supporting growth, BNM could embark on loan tenure extension or lower borrowing interest rates but this is not good in the long run,” he said.

Sia cited sudden risks to the economy such as a recession or downturn that could result in unemployment leading to a hike in non-performing loans and eventually weakening the banking industry.

“[On the one hand], BNM has to support growth but on the other hand, stability must be preserved, which is essential for the economy,” he said.

Sia said the combination of more entrants into the job market and completion of public transportation projects, such as light and monorail transits, increases opportunities for house buyers to live outside cities and commute to work.

“This can help with affordability of homes as it would be cheaper outside [of] city areas,” he said.

In its statement, BNM said the fundamental issues that require resolution are affordability and the shortage of supply of reasonably-priced houses.

It added that the implementation of its responsible financing guidelines serves to protect individuals’ interests so that they borrow within their capacity to repay the loans throughout its tenure.

“This is to prevent borrowers from falling into financial hardship due to excessive debt burden that may lead to foreclosures, which will undermine the objective of house ownership,” it said.

“BNM wishes to state that financial institutions will continue to lend to individuals who can afford to take on a housing loan, including for the purchases of their first homes.

“In July this year, outstanding housing loans extended by financial institutions continued to grow at 10.1% year-on-year to total RM460.2 billion,” it said.

The central bank also pointed out that some 1.5 million or 75% of borrowers with housing loans are first-time house buyers.

Independent economist Chung Tin Fah concurred that extending the house loan tenure period was not feasible due to the high risk level.

Instead, government authorities, bankers and developers should discuss the actual cost of building houses, which has skyrocketed 30% to 40% in the past three to five years.

“Of course, developers would love to increase house prices and cite land cost as the major reason but the question here is: How much does it cost to build houses? What is pushing it up? Demand versus supply? Profit margin? Material cost is fairly stable especially steel due to the glut.

“If public transport accessibility is increased, then land prices are more reasonable outside cities, which means house prices should be lower,” Chung told The Edge Financial Daily.

He added that developers should review house prices because it was not fair for banks to bear the burden of financing house buyers due to increasing prices.

Meanwhile, the Association of Banks in Malaysia (ABM) and Association of Islamic Banking Institutions Malaysia (AIBIM) said Malaysian banks have declined home financing applications due to high debt service ratio, adverse credit, insufficient income or weak documentation/banking records to support the application.

In a joint statement, they said those were the top reasons revealed in a recent survey on rejected applications.

“Buying a home is a major financial purchase and a home financing facility usually forms the highest value item of a customer’s debt portfolio,” they said. “Thus, it is crucial that banking institutions establish that a customer has the financial capability to make repayments/payments during the financing tenure.”

ABM and AIBIM said generally, an evaluation of any application for financing would be based on how an applicant matches up to a set of criteria. It encompasses broad areas or the five Cs of credit as they are referred to — character, capacity, collateral, conditions and capital.

However, the banks reiterated they would continue to provide home financing facilities to eligible customers.

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