For most people, owning a house is an ultimate dream and a major milestone in life. However, there are many challenges that come along in the journey of purchasing a first home.
Firstly, high housing price is always the main obstacle to owning a house. According to a Department of Statistics Malaysia’s (DOSM’s) survey, the median monthly income in the country was RM5,873 in 2019 and the price ceiling for affordable housing was about RM211,428 under the Median Multiple approach which claimed affordable housing price should be three times or less than the median household incomes. However, the average price for newly launched houses in the country was RM417,262.
Secondly, a reason why potential homebuyers fail to achieve their dream might also be due to loan rejection. PropertyGuru’s Consumer Sentiment Survey H2 2018 revealed that 56% of Malaysian respondents experienced a tough approval process for housing loan applications – reasons for which include applicants having too many existing loans, unstable salary and bad credit history. These prevalent homeownership issues have set the stage for the new concept of property funding to appear – Crowdfunding. This article aims to discuss the feasibility and sustainability of FundMyHome, a homeownership platform launched under the Property Crowdfunding Scheme, which aims to assist first-time homebuyers infunding their first house-purchase.
To address these homeownership issues, the Malaysian government decided to join this new fundraising trend by launching a property crowdfunding scheme in Budget 2019. The scheme was designed to help fund the first-house purchase of those who are unable to afford the high price of housing and those who fail to qualify for conventional housing loans. In September 2019, the first license of Recognised Market Operator for a property crowdfunding platform was issued to EdgeProp Sdn Bhd. The first property crowdfunding platform in Malaysia called FundMyHome, is specifically tailored to first-time homebuyers. Joining the scheme does require that applicants meet a few criteria: The prospective homebuyer has to be Malaysian, at least 21 years old, no prior ownership of any property and no bankruptcy record.
FundMyHome is quite similar but its business operations do not wholly apply the crowdfunding concept. It is understood that crowdfunding refers to fundraising conducted by asking small amounts of money from a large number of people, while the funds for this platform are fully raised from institutional investors such as banks.
How does this platform work?
Under this platform, homebuyers are only required to pay 20% upfront of the purchase price while the remaining 80% will be paid by institutional investors. During the five years tenure period, the homebuyer is required to stay in the property, but renting rooms out is permitted. After five years, the homebuyer has to decide on whether to keep the property or to sell it. If the homebuyers decide to keep the property, he has to buy up the entire property via home loan or refinancing after five years. On the other hand, a homebuyer who agrees to selling the property will share the profits or losses of the property based on the difference between market price and initial purchase price.
Other Property Funding Method
Conventional Mortgage Loan
A Conventional Mortgage Loan is the most common funding option for people to purchase a house that is not insured by the government. In Malaysia, conventional home loans can be divided into 3 broad categories, including term loans, semi-flexi loans and flexi loans. The borrowers are also given two types of interest rate package to choose which are fixed interest rate and variable interest rate. For loans with fixed interest rate, its interest rate will be fixed throughout the loan while the variable interest rate is tied to the base rate (BR). The borrowers need to determine which loan product matches their objectives and purchasing needs.
The Malaysian government has provided a bundle of homeownership programmes with different targeted groups.
- My First Home Scheme
This scheme was first announced in 2011 and is administered by Bank Negara Malaysia. It allows first-time homebuyers to obtain 100% financing from recognised banks and financial institutions, enabling them to purchase their first house without paying the 10% down payment. Recently, Digital SPR has been announced, aiming to provide an integrated platform which connects home buyers, bankers, developers and real estate agents.
- MyDeposit Scheme / First Home Deposit Funding Scheme
MyDeposit Scheme was first announced in Budget 2016, aiming to help the lower-and middle-income group, with a household income up to RM10,000, in purchasing their first house. An eligible first-time homebuyer will be provided a once-off contribution to 10% down payment or a maximum payment of RM30,000. The property is not allowed to be sold for a period of 10 years and renting out the house is prohibited.
- BSN Youth Housing Scheme
The scheme which is administered by Bank Simpanan Nasional (BSN) offers up to 100% loan to single or married youths to own their first home. In addition, the eligible youths (aged 21-45) will be able to enjoy 100% stamp duty exemption up to RM300,000 and monthly financial assistance of RM200 for the first two years.
Comparison between FundMyHome and Other Property Funding Method
- Entry requirement
For the homebuyers to qualify for a conventional house loan, they have to meet a list of tight conditions which reflect their “financial health” for the banks to ensure they can afford the monthly payment. A credit score is one of the ways to check for financial health. Through the tight requirement, the banks and other financial institutions are more secure from facing the loss of bad debt. In order to help those who are unqualified for conventional house loans, some government initiatives are built with ease of eligibility criteria and financial requirement.
For FundMyHome, the entry requirements are even lower as the government only provides the platform without providing any monetary assistance for the homebuyers. To assist the first time homebuyers to step in the property market easier, the government has lowered the entry barriers where the homebuyers can purchase a house by only paying 20% of the purchasing price for the five years tenure period.
For conventional mortgage and government homeownership initiatives, the homebuyers will legally own 100% of the property once they buy it and repay the home loan gradually. However, under FundMyHome, the homebuyers will have to share the ownership with the institutional investors according to the payment ratios. The full ownership of the property will only be entitled to them if they pay fully for the property after the initial five-year period.
- Home equity
Home equity refers to the amount of ownership over a property in which the homebuyers have legal interest. In simple words, it tells you how much you own the property. Under normal mortgage and government initiatives that provide loans, the home equity of the homebuyers increases over time since their payment on principal also increases. To illustrate, a person buys a house that costs RM500,000 and pays RM80,000 as downpayments which means his bank loan is RM420,000. In this case, he will have 16% of home equity over the property initially. After five years, if he had paid RM100,000 of the loan, the bank’s equity in his house decreased by RM100,000 while his home equity increased by the same amount.
However, the home equity of the property bought under FundMyHome will remain 20:80 throughout the tenure period. It will only change when the homebuyers make a decision on keeping or selling the property after five years.
- Risk Exposure
Most of the government homeownership programmes have prohibited the homeowners from conducting any selling activities for a specific timeframe such as 10 years for MyDeposit programme. Therefore, the volatility of the property’s market price does not affect the homebuyers much.
However, the homeowners who purchase a house under FundMyHome are exposed to more uncertainties. Firstly, if the property price declines by up to 20%, the buyer will also lose the initial capital of up to 20% after the five years tenure period. Therefore, they might suffer a loss on the selling of the property and as well as if they decide to buy the full ownership of the property. However, it is a double-edged sword as they might also be able to gain money if the price of housing rises. In addition, if the homeowners are also exposed to refinancing risk and they intend to buy the entire property via home loan after the tenure period ends as the interest rate for the home loans might be higher after five years.
Sustainability in the Long Run and Short Run
Undoubtedly, by filling up the financial gap, this homeownership platform might help the potential homebuyers to purchase their first house easier since the initial capital required is lower, especially for those who do not qualify for conventional housing from financial institutions. However, it probably raises more problems. With a lower entry requirement, this scheme may attract more people to enter the property market hastily, including those without good financial stability by raising the default risk of the homebuyers.
After the five year of the tenure period, many homebuyers probably realise that they are not ready to take on the financial responsibility of homeownership and decide to sell the property. A vigorous cycle will be created where the property overhang issues will be raised again.
In addition, given that the housing price drops after five years, they will be worse off as they are responsible to absorb the first 20% loss. Although it also provides an opportunity for them to gain from the appreciation in housing price, a first-time homebuyer without strong financial ability should avoid themselves from this kind of speculative risk.
With a concept similar to Crowdfunding, FundMyHome is a new innovative path to homeownership. However, the existing framework for the property market might need to restructured and improved in order to provide a more long-term solution for homeownership issues. It might become a threat to the stability of the market, by agitating potential first-time homebuyers who are ill-prepared to take on the financial responsibility of owning a house. Therefore, a rational homebuyer should be well-aware and cognizant of the potential risks such a decision might entail. The first step we recommend, is a sound and unbiased assessment of their financial health before thinking about taking up this scheme.
Researcher: Evon Chew
Reviewers: Yang Ler Lee, Millen Lau
Editors: Arivaasaran Arjunan, Stella Teoh
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