With the tabling of Budget 2017 just a week away, Putrajaya is in talks with the Employees Provident Fund (EPF) to raise Account 2 contributions from 30% to 40% to aid first-time homebuyers.
The Finance Ministry, the government department spearheading the proposal, said the raise is aimed at those buying affordable homes. EPF however said it has yet to commit to the proposal and would continue exploring options with the ministry.
If the ceiling to withdraw money from Account 2 is raised, it empowers members to pursue their purchase of a home and experience better cash flow as less money is spent on the loan.
In theory, the ten-point increase puts more cash in members’ hands but that means eating into their retirement fund.
So is the withdrawal increase to 40% a good idea?
EPF withdrawals for housing on the rise
Malaysians have been falling back on their EPF savings for many major financial decisions, such as buying a home. EPF revealed that 1.8 million members withdrew nearly RM6 billion in savings from Account 2 in 2015 to purchase their first home, second house and to service their monthly mortgage to pay off their home loans.
According to its data, members were increasingly reliant on EPF savings to help purchase either their first or second property, with an average of 6.8% a year in the past five years from 2010, when 1.4 million members withdrew RM4.3 billion.
The RM5.98 billion in withdrawals last year to buy houses made up 13.6% of the RM44 billion withdrawn by 3.3 million EPF members. Withdrawals to buy homes made up 13.6% to 16.4% of total annual withdrawals between 2010 and 2015.
How it works
EPF allows its member to make withdrawal from their EPF Account 2 for the following reasons:
| Withdrawal to purchase/build a house | ||
|---|---|---|
| A) House built/purchase by Individual/with Spouse (Building cost/Property price – Loan amount) + 10% of building cost/property price | OR | All your savings in Account 2 |
| B) 100% housing loan 10% of building cost/property price |
||
| C) House built/purchase by cash Building cost/Property price + 10 % of building cost/Property price |
||
| Withdrawal to reduce/redeem a housing loan | ||
|---|---|---|
| Total of housing loan balance | OR | All your savings in Account 2 |
| Withdrawal to pay down housing loan monthly instalment | ||
|---|---|---|
| Total of housing loan balance | OR | All your savings in Account 2 |
Here’s the difference increasing your Account 2 to 40% of savings would make to your purchase:
Assuming you started working at age 22 with a starting salary of RM2,500 and an average increment of 5% annually. You have been contributing 11% of your income, while your employer has been contributing 13% monthly. At 35 years old, you would like to withdraw from your Account 2 to purchase a home.
| Property purchase price | ||
| Loan amount (90% margin of finance) | ||
| Amount needed for down payment (10%) & other costs (10%)* | ||
| Balance in Account 2 | ||
| Amount that can be withdrawn** | ||
| Upfront cash still needed | = RM9,300 | = RM0 (Excess of RM10,920) |
**Amount that can be withdrawn is based on the lower of the amount between Eligible Amount and Balance in Account 2.
However, even with the rising withdrawals from EPF, many Malaysians may still be unable to purchase their first home. This is because Malaysia’s housing is considered to be “severely unaffordable” in a report by Khazanah Research Institute (KRI).Based on the comparison above, a property buyer will be able to cover more of the upfront cost of buying a property with a bigger fund in Account 2.
This brings us to the next point…
Does it make housing affordable?
The World Bank defines affordable homes as those priced at three times the annual median household income or less. With half of Malaysians earning RM4,585 a month, house prices need to be below RM165,060.
According to the Bank Negara Malaysia, only 21% of new housing launches in Malaysia were priced below RM250,000 in 2014. In contrast, data points to an oversupply of higher-end properties priced above RM500,000 (36% of total new launches).
As for wages, the Minimum Wages Order 2016 stipulates that wages are set according to region, namely RM1,000 per month or RM4.81 per hour for Peninsular Malaysia, and RM920 per month or RM4.42 per hour for Sabah, Sarawak and Labuan.
According to the Finance Ministry, the household debt of Malaysians stands at RM1 trillion or 89.1% of the gross domestic product (GDP) – one of the highest in Asia.
Central bank data shows that banks’ rejection rate for loan applications for residential property purchases hit an all-time high of 61.7% in January. In July, the rejection rate was 57.3%.
Overall property market has also taken a beating with developers selling 39% of new units launched in the first half of this year, down from 52% in the second half of 2015, according to Real Estate and Housing Developers Association.
Malaysians are struggling to meet the stringent requirements to finance a new property and the market is not doing well either. But land is still rising, with some suggesting that the government build affordable housing on cheaper plots.
Retirement blues
A large EPF withdrawal, given current circumstances, might help potential homebuyers. But the price to pay for this option cannot be underestimated – eroding funds meant for old age.
Malaysia is expected to reach the 7% threshold the World Bank defines as an aging society in just five years in 2021. By 2035, one in 10 Malaysians will be aged 65 and above.
Latest EPF stats show that more than 78% of the 6.7 million active EPF contributors do not have the minimum recommended saving of RM196,800 for retirement. The figure assumes members need RM820 a month for 20 years, given the average Malaysian will live to about 75 years old. Most, however, had only RM50,000 which would run out in five years.
EPF recently revised the quantum to RM228,000, effective January 1, 2017. It cited the escalating cost of living, longer life expectancy and higher inflation rate.
How many members will fall into that quantum is yet to be ascertained but in a nutshell, many Malaysians aren’t prepared for retirement.
Who gains from this?
Let’s say a larger withdrawal becomes a reality. Do all EPF members stand an equal chance to reap the benefits?
For those with deft money-managing skills, the increment of Account 2 balance may allow them to grow their wealth through real-estate investment. By withdrawing the money from their EPF to fund their housing, one can use any additional cash on hand to clear consumer debt such as credit cards and loans instead. Or they can use the surplus to invest for better returns or even fund higher education.
These people will experience better cash flow as less money is spent for their housing loan.
However, to still protect their retirement dream, EPF members can consider tapping into the EPF Members Investment Scheme, which allows member to invest a percentage of their savings from Account in approved unit trust funds. The additional returns, if any, can boost their chances of surviving through retirement.
Other options include investing separately in shares and bonds, buying an annuity plan or a private retirement scheme to complement their EPF savings, and even another property.
But for the financially illiterate or the spendthrift, more money means more trouble. It is this group of people where this facility is more of a bane where they might just end up not having adequate funds to live through retirement.
