Effective from 1st Jan 2012, banks have started using net income instead of gross income to calculate the debt service ratio for loans. The guideline covers housing, personal and car loans, credit cards, receivables and loans for the purchase of securities. The effectiveness of the ruling can be seen in the lower number of vehicles and properties sold since January.
The Central Bank has good reasons to rein in the rising ratio of household loans to income as the benefits are manifold. Previously, whoever signed up for a new housing loan and other types of consumer loans could be grossly over-geared and may have inadequate disposable income for monthly household expenses. Don’t forget that for many sole breadwinners, they also have to shoulder a host of other payments - spouse and children’s household expenses and education fees, pocket money to ageing parents and dependents, and other miscellaneous expenses.
Consolidation of Household Income
With the prevailing uncertainties in the world today, it is a good time for families to consolidate their household income and expenses account. Consumers need to be more responsible in managing their finances especially those who take loans to buy property, and the knowledge of how to self-regulate.
“Too many young people are getting themselves deep in debt, as they usually accumulate debts between the ages of 20 and 30” said Kevin Cheong, Managing Director from AceScube (M) Sdn Bhd “I believe the right policy is the first step to steer people in the right direction of living within their means rather than allowing them to become dependent on debts to maintain their lifestyle.”
“The recent Responsible Lending Guidelines to ensure prudent lending to retail sectors would also ensure only those who were eligible to furnish their loans be allowed to obtain financing,” he added.
“I again encourage Malaysians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up some day,” he said. Bank Negara Malaysia (BNM) has issued similar caution a year ago to ‘normalize’ the fluctuation of the Overnight Policy Rate (OPR).
Impacts to the Property Buyer
As for the property sector, the net income formula and maximum loan-to-value ratio of 70% for a third and subsequent housing loan taken by a borrower would avert unhealthy speculative activities and rein in a sharp jump in property prices. The lower loan quantum would inadvertently increase demand for affordable housing products and developers would have to redesign their products to cater to this market.
Nevertheless, those with the means and surplus cash to spare can opt to invest in more properties as they still offer one of the best hedges against inflation. Even though worries of an economic slowdown may lead to a potential property bubble, buying property in developed areas with public amenities and near commercial hubs are the key factors to considering a buying decision regardless of timing.
With reviewed property prices in the past decade, and a budget of RM 200,000.00 to opt for a property, there is a wide selection within the Klang Valley. Nowadays, the same budget to buy a property within the Klang Valley is hard to come by. However, after the great recession we went through within the decade, property prices were only slightly affected, returning to its pre-recession peak from 2009.
“Referring to more than 4,000 customers who engaged in housing loans for their own residences or investment, worry of an unpredictable risk on taking a housing loan is the major concern while making a property buying decision,’’ says Kevin “loan offering by financial institute today is up to 40 years of age or up to age 65 and borrowers are facing property foreclosure risk throughout the loan contract term. Rising living cost and reduced earnings are depleting savings of elderly and more pensioners will die in debt.”
Property investment is still the top ranked option to cope with inflation based on records of long term investment and subject to the way you manage a housing loan. AceScube’s BLR Management Service helps reduce the impact of BLR (Base Lending Rate) fluctuation to housing loan, and slashing up to 50% of loan tenure and interest with advice on individual financial situations, loan contract terms and account status that comes with legal assurance in managing the crisis.
In fact, AceScube is offering a Customer Appreciation Program to assist housing loan borrowers who intend to shorten their loan tenure by half, avoid loan tenure extension and extra interest chargeable beyond their loan contract, and the best part is to without paying extra from their own pocket.
This article is contributed by AceScube, which provides training in loan calculation, banking and finance knowledge and other business and communications know-how for entrepreneurs. For more information on starting a business with them, you may drop them an email at firstname.lastname@example.org to find out more about BLR Management.