The New PR1MA Financing Plan: A Step Up Or Step Down?
Weeks before Budget 2017 was tabled, Prime Minister Datuk Seri Najib Razak launched an online survey where Malaysians were asked to list their top three concerns about the economy. In pole position were the rising cost of living and soaring housing prices.
Malaysia already has a household debt of 89.1% or RM1.03 trillion, one of the highest in the region, which has led Bank Negara Malaysia to maintain its tight lending measures.
But the central bank has denied the reason Malaysians are struggling to land their first property is due to its lending measures, alluding to the lack of affordable housing instead. The Finance Ministry also seconded this and urged the government to provide cheaper housing as demand exceeded supply.
During his 2017 budget speech, Najib said house ownership was very close to his heart and the government was committed in ensuring that every family could own a house.
One of the incentives unveiled for homebuyers under PR1MA is the “stepped up” end-financing scheme which aims to help selected PR1MA buyers, particularly those struggling to draw out a loan, to land their first home.
But before diving into the scheme, let’s recap what PR1MA is all about:
The nuts and bolts of PR1MA
Established in 2013, Najib launched PR1MA as an affordable housing scheme to assist middle-income households to purchase their first home. It has a mandate of building 500,000 homes with the aim of alleviating the rising cost of living faced by middle-income earners, or the M40 group.
|Individual or combine household income (husband and wife) between RM2,500 and RM10,000|
|Single or married age 21 and above|
Houses under the scheme are priced between RM100,000 to RM400,000 and located in various urban centres nationwide. To be an owner of a PR1MA home, a buyer will need to register and submit his or her name for balloting.
After being selected, participants will need to verify relevant documents to ensure eligibility, choose their preferred unit based on availability and financing. Prior to Budget 2017, the only scheme available under the PR1MA HOPE Home Assistance Programme is end-financing:
The difference between this and a conventional home loan is simply that buyers can obtain a 110% loan under the PR1MA as opposed to the conventional 10% down payment and additional miscellaneous fees.
So why a “stepped up” end-financing scheme?
According to Najib, the scheme allows buyers to obtain financing easier with a total loan of 90% to 100%.
It helps homebuyers ease their monthly instalments for the first few years and rejection rates are drastically reduced, meaning opportunities to get a higher loan.
• Stepped-up financing for the first 5 years of the loan
• EPF Account 2 withdrawal for the purpose of PR1MA home instalment up to retirement or end of tenure
|What does "stepped-up" financing mean?||• First 5 years: Interest only
• Subsequent years: Interest and principal*
|Which banks offer this scheme?||PR1MA's panel banks: Maybank, CIMB, RHB and AmBank|
*Buyers can also choose to either or both when it comes to stepped-up financing or through EPF.
How it works
Let’s say Ahmad, 32, has finally decided to purchase his first property. He has been working for ten years and he currently earns RM3,000 a month. He does not have any outstanding loans and has been chosen for a PR1MA property worth RM250,000.
He has decided to finance the purchase through a combination of the stepped-up end-financing scheme and by withdrawing monthly from his EPF Account 2.
|Loan period in years:||35|
|First 5 years (Interest only)||RM876 x 60 months = RM52,560|
|Subsequent years (interest and principal)||RM 1,200 x 360 months = RM432,000|
|Interest and principal:||RM1,200 x 420 months = RM504,000|
So the first five years, Ahmad decides to pay it using his salary. An interest of RM876 would roughly be about 30% of his monthly income, which is an acceptable percentage to dedicate.
Ahmad has been working for ten years, since he was 22, when he chose his desired PR1MA unit. After financing the housing loan through the stepped up plan for the first five years, he decides that from the sixth year onwards, he will use the balance in his Account 2 to pay the loan:
|Balance in Account 2:||RM39,150|
After reading the terms and conditions on the EPF website, he decides to go for the monthly instalment, which allows the buyer to set up a standing instruction for money from Account 2 to be directly paid to the bank or even credited to his or her bank account. For Ahmad, that means hassle-free payment.
But there are strings attached
EPF chief Datuk Shahril Ridza Ridzuan has advised members to weigh their options carefully before thinking of dipping their hands into their Account 2 to finance the housing loan.
He said those opting for the scheme to buy their first home would have their savings in Account 2 “ring-fenced” to help them settle their loans in a timely manner.
Shahril went on to advise that applicants who see an improvement in their incomes over time should consider refinancing the loan to release the “ring-fence” on Account 2 so they could access it for other purposes.
Refinancing is simply getting a new mortgage to replace the original loan. This allows a borrower to obtain a better interest term and rate, and also access their home equity when the value of the home goes up.
For example, a RM250,000-home may appreciate in value to RM350,000 in 10 years, while having a smaller amount owed after paying for the mortgage for 10 years. By refinancing the loan based on the market value of the home, the borrower will be able to cash out the difference.
One step forward, two steps back?
The stepped-up financing is an option for those who are set on landing their first home and with a steady income flow. This person should also have a good credit health as that may help him or her qualify for better interest rates.
The removal of upfront payment does make it easier for a homebuyer to explore the market and the 5-year period paying only interest allows for better cash flow. Without the 110% financing option, a homebuyer would have to fork out at least RM25,000 for down payment, and another RM20,000 for miscellaneous fees.
What is yet to be ascertained is whether there will be an increase in interest rates and if there are any costs brought forward from first five years into the remainder of the loan.
However, tapping into Account 2 risks exhausting funds meant for retirement. EPF recently revealed that only 22% of its members have enough for retirement, that leaves a good 78% ill-prepared. Also for Muslims, the scheme risks giving up their right to perform the Hajj.
Then there is the problem of using the Account 2 for medical emergencies or to fund a child’s tertiary education. Property may be a good asset, but it is not liquid. So in case of an emergency, the owner can’t sell the home immediately for money.
One analyst weighing in on the scheme caution banks of the dangers of lowering their criteria to extend loans to buyers who cannot actually afford one.
“This is how the subprime crisis happened in the US, when people who couldn’t afford mortgages were given mortgages. If it is widespread enough, markets worsen, salaries are cut and layoffs happen, there will be people who can’t afford to repay their loans,” he said.
The EPF also weighed in on this and cautioned that higher withdrawals from the pension fund could risk a housing bubble, where the opening up of the Account 2 could encourage people to buy assets that they may not be able to afford.
According to PR1MA and news reports, the stepped-up scheme will be implemented in January 2017.
iMoney has reached out to PR1MA to get more specific details on the scheme but was informed that the scheme is still a work in progress, and any information on the scheme does not have the clearance for release.
Image from Property Guru