Second generation housing loans: A burden to offspring?

Talks of the Government wanting to promote second-generation or dual-generation loans or housing loans is currently prevalent in Malaysia. This article takes a look at why such a proposal is not recommended as it would bring more harm than good to homeowners.

Undoubtedly, Malaysia is facing a housing crisis where most of the Rakyat cannot afford to buy their first home. As early as 2012, the National House Buyers Association (HBA) raised alarm bells that housing prices were beginning to escalate out of control and unless immediate remedial measures were taken, a “Homeless Generation” will emerge. This means an entire generation or even generations of the Rakyat, from the lower to middle-income segment (B40 and M40) as well as our fresh graduates, will not be able to purchase their first homes.

 “Since 2012, the increase in house prices in Malaysia has outstripped the rise in income levels. Consequently, prevailing median house prices are beyond the reach of most Malaysians.”  – BNM 2016 Annual Report-

Fast forward a decade, and the situation has not improved in 2022. Based on Bank Negara Malaysia Financial Stability Review Report Second Half 2021, the median property price in Malaysia is 4.7x the median income in Malaysia. It can be classified as “Seriously Unaffordable” by international standards.

Fixing the current housing crisis is not going to be easy or fast as the problem did not happen overnight. Various parties have come out with their own formulae or suggestions on how to enable the Rakyat to buy their dream home. 

What are Second Generation Housing Loans?

There are various permutations for what Second Generation Loans or Dual Generation loans mean, but in a nutshell, these housing loans entail one or more of the following features:

• Borrower taking a housing loan with a tenure of 40 years or more which will well exceed the expected retirement age of the Borrower.
• Borrower can make a bullet repayment to fully repay the outstanding loan amount using his EPF Savings upon retirement age.
• When the Borrower is no longer able to work and if the Housing Loan remains outstanding, the Borrower’s children, i.e. the Second Generation can continue paying for this Housing Loan until it is fully settled.

Whilst the Government may have good intentions for every Rakyat to own a home and for families to live together, HBA believes that these second-generational loans will not help to solve the current housing crisis and will only exacerbate the situation in the mid to long term. HBA believes that the Government may have been ill-advised by parties with a vested interest, namely Financial Institutions and Housing Developers on the merits of these so-called Intergenerational Loans.

Why are second-generation housing loans a bad idea?

1. First generation unable to retire comfortably

The main reason why most Malaysians buy a house is so that when they retire, they will not be homeless and have a roof over their heads. Else, why bother going through the hassle when you can just rent a house? Hence, it is important that homebuyers match the liability of owning a house against their expected income stream.

A mismatch can result in homebuyers being unable to service their monthly mortgage obligations and risk foreclosure by banks which can result in property bubbles and even a global financial crisis, as evident from the 2007-2008 sub-prime crisis in the USA which resulted in the worst economic crisis since the Great Depression of the 1930s.

By committing to these second-generation loans which carry a loan tenure of 40 years or more and which will extend to at least 70 years of age assuming the borrower was just at a relatively young age of 30 years old when the loan was first taken; the house buyer may not in a position to retire when he/she reaches 60 years old and must continue working to service the outstanding loan obligations in the event for whatever reason, the second generation is unable or unwilling to serve the remaining outstanding obligation.  What if the homebuyer is no longer in optimum health and can no longer work? Under this scenario, the buyer will face foreclosure even after paying the housing loan for more than 30 years.

READ: Housing loan: How to apply as a first-time homebuyer in Malaysia

2. EPF Savings are meant for retirement

As mentioned above, some second-generation loans might have a bullet repayment feature, whereby upon the Borrower reaching retirement age, he/she can use EPF savings to pay off the loan. However, in reality, the majority of Malaysians do not have enough money in their EPF accounts to retire comfortably and hence will not be able to use their EPF funds to repay the balance of the Intergenerational Loans upon retirement.

It has been reported that EPF estimates that 73% of its members will not be able to meet the already-low basic savings threshold of RM240,000 at age 55 to retire and some 46% of its contributors below 55 have less than RM10,000 in their EPF accounts.

The primary reason for EPF savings is so that the contributors will have some financial safety net upon reaching retirement age. Even for those who may have excess funds in their EPF account, exhausting their EPF savings to fully repay the second-generation loan is not a good move as it would mean that the Borrower would not die homeless but may possibly die of starvation or lack of funds for a medical emergency.

3. Higher interest expenses

It cannot be denied that the monthly instalments of these second-generation loans are lower than a conventional loan tenure but because the tenures are significantly longer, the homebuyer also pays significantly much more interest over the entire tenure.  In some instances, the interest portion can even be higher than the principal loan amount.

HBA recommends that homebuyers should ideally take up a loan tenure of 20 years and if unavoidable, it can be stretched up to 30 years. If you cannot afford a home beyond a 30-year tenure, accept reality and opt for something more affordable.

To illustrate, based on a Housing Loan of RM300,000 and assuming an effective interest rate of 3.5% p.a. over the entire tenure, the monthly loan repayments of a 20-year to 50-year housing loan are as follows:

Type of Housing Loan	Traditional loan		Second Generation Loan
Loan tenure	20-years	30-years	40-years	50-years
Monthly repayment	RM1,740	RM1,347	RM1,162	RM1,060
Total repayment	RM417,600	RM484,920	RM557,760	RM636,000
Principal loan amount	RM300,000	RM300,000	RM300,000	RM300,000
Interest portion	RM117,600	RM184,920	RM257,760	RM336,000
Interest paid as a percentage of the principal loan amount	39.2%	61.6%	85.9%	112.0%
Loan outstanding at end of Year 30	–	–	RM117,527	RM182,702
Percentage of loan outstanding at the end of Year 30	–	–	39.2%	60.9%
Percentage of loan tenure remaining at end of Year 30	–	–	25.0%	40.0%

As illustrated above, the monthly repayments for the second generation loan are lower than the traditional loan tenure (approx RM578 lower comparing 20-years and 40-year loan tenure) but in reality, the homebuyer only saves RM578 for the first 20 years but ends up paying RM1,162 extra for the remaining 20 years.

By taking a second-generation loan and stretching the loan repayment tenures, the interest portion for an Intergenerational Loan can be much higher than the principal amount of the original loan. Hence, it is more economically beneficial for the buyer to take on shorter loan tenures and pay off the housing loan faster. It makes better sense to tighten one’s pursestrings while the homebuyer is still gainfully employed.

4. Loan outstanding is not directly proportionate to oustanding tenure

The current financing practice is as such in Malaysia – The monthly loan instalment that the borrower pays to the bank is split between paying the interest and the balance will then be used to reduce the principal loan amount. As the principal loan outstanding is high at the start of the housing loan, a higher amount of the monthly loan instalment is used to service the interest. Hence, the principal loan outstanding does not correspond directly to the remaining loan tenure.

Referring to Table 2 below, if the borrower takes a second-generation loan of say 40 years and have paid 30 years or about 75% of the tenure; the Borrower may expect that since he/she has paid 75% of the tenure, the loan outstanding would be 25% of RM300,000 or RM75,000.  However, in reality, the loan amount is RM117,527 or 39.2% of the original loan amount of RM300,000.  If the borrower had taken a second-generation loan tenure of 50 years, the borrower would have paid 60% of the loan tenure, the loan outstanding is RM182,702 or 60.9% of the original loan amount.

The borrower would have underestimated the actual loan amount and could be out of money in trying to settle the outstanding housing loan and could be forced to either continue working or get his children to take over the remaining loan obligations. The consequence is to risk the banks foreclosing on the property after diligently servicing the loan obligations for 30 years!

Type of Housing Loan	Traditional loan tenure		Second Generation Loan Tenure
Loan tenure	20-years	30-years	40-years	50-years
Loan outstanding at end of Year 30	–	–	RM117,527	RM182,702
Percentage of Loan outstanding at the end of Year 30	–	–	39.2%	60.9%
Percentage of loan tenure remaining at end of Year 30	–	–	25.0%	40.0%
Theoretical loan outstanding based on the percentage of remaining loan tenure			RM75,000	RM120,000

5. Second generation born into ‘debt’

In the olden days when slavery was legalized, children of slaves were born into slavery. Slaves had no rights and similarly their children had no rights and this cycle perpetuated over itself. By taking a second-generation loan, these homebuyers would have inadvertently committed their children to a financial commitment even before their children are old enough to enter into any sort of legal contract. Parents should only bequeath inheritance to their children after their own passing and never leave their children with unpaid financial debts commitments. What if there is a situation of several children (born and unborn at the time of the loan)? What about division of property (Civil or Syariah) in the event of demised of the principal borrower? Which one of the children should ‘inherit’ the burden?

Hence, when their children are just entering the work force, these second generation have a financial commitment and a burden to serve that they did not enter into and is unable to break without jeopardising their parents whom could be sued by the banks for non-performance or risk the family home being foreclosed. Is it fair to the second generations to face such financial commitments? What if their children have to work in other states and have their own family? Would they be able to service their own financial obligations and this Intergenerational Loan at the same time?

MORE: Debt Service Ratio (DSR): How to calculate and how does it affect home loan approval?

6. Only suitable for short-term buyers / property speculators

So, given all the demerits surrounding second-generation housinhg loans, who then would apply for such loans? In HBA’s opinion, such loans would only attract buyers cum investors who wish to live in said property on a short to medium term basis (say 3 to 5 years) and wants to hedge against any potential increase in rental rates (or sudden eviction by the house owner) and/or property speculators who wish to make a quick buck and lower their cost. Table 3 illustrates such a scenario.

Type of Housing Loan	Traditional loan		Second Generation Loan
Loan Tenure	20-years	30-years	40-years	50-years
Monthly repayment	RM1,740	RM1,347	RM1,162	RM1,060
Annual repayment	RM20,880	RM16,164	RM13,944	RM12,720
Value of property and assuming 100% financing	RM300,000	RM300,000	RM300,000	RM300,000
Equivalent Rental Yield	6.96%	5.39%	4.65%	4.24%

Using the same information in Table 1, short-term houseowners cum investors or property speculators are better off if they take second generational loan tenures of 40 years or longer and only stay or hold the property for about 3 to 5 years before selling it off and moving on to another property.

This is because the equivalent rental yield paid by such house owners/investors/speculators may even be lower compared to renting outright or a conventional loan tenure. Besides, such short-term owners are able to freely renovate their property as they wish something that they cannot do if they just rent. However, such short-term house buyers cum investors or speculators are subject to risk of the property prices fluctuating.

7. Chief beneficiaries are Financial Institutions and Housing Developers

The chief beneficiaries of Intergenerational Loan are Financial Institutions and Housing Developers.  Financial Institutions will make a higher profit as evident from Table 4 below and Housing Developers will be able to sell properties of higher value because banks are willing to finance such properties.  This will only worsen the situation of the younger generation not being able to afford their first homes.

Type of Housing Loan	Traditional loan tenure		Second Generation Loan Tenure
Loan Tenure	20-years	30-years	40-years	50-years
Monthly repayment	RM1,740	RM1,347	RM1,162	RM1,060
Total repayment	RM417,600	RM484,920	RM557,760	RM636,000
Value of property and assuming 100% financing	RM300,000	RM300,000	RM300,000	RM300,000
Interest portion	RM117,600	RM184,920	RM257,760	RM336,000
Average Annual Interest Income to Financial Institutions	RM5,880	RM6,164	RM6,444	RM6,720

Government must give incentives for affordable housing

The Government must continue with its aspiration for every Rakyat to have a roof over their head but Second Generation housing loans are not the answer.  The Government should take cognizance that such loans can be abused by property speculators as a means of cheap financing and disallow Financial Institutions to extend such Second Generation loans as it will only worsen the housing crisis in the mid to long term.

The Government should instead offer incentives for housing developers to build affordable housing for the masses, especially the lower and middle income.  The Government must also put in place measures to stem excessive property speculation fueled by easy credit such imposing higher stamp duty for transfer of properties and higher Real Property Gains Tax(RPGT) for owners of multiple properties. 

This article is written by Datuk Chang Kim Loong, Honorary Sec-Gen of the National House Buyers Association (HBA) which is a voluntary non-government and not-for-profit Organisation manned wholly by volunteers. Their contact: [email protected]