As at 4 November 2018, two days after the announcement of Belanjawan 2019 by FM Lim Guan Eng, the Edge Property has launched a new innovative scheme to home financing under FundMyHome.com. It is a platform introduced to help first-time home buyers to fund their home purchases by crowdfunding, instead of the conventional way of applying for a mortgage from the bank.
I believe most of us, if not all, welcome initiatives that encourage ownership of properties among Malaysians. Hence, I checked out the website and studied its offerings to first-time buyers. From it, I was left with a series of questions on its effectiveness to solve the issue of affordable housing in our country.
In this article, I would be writing from the angle of a first-time home buyer who is single, about 30 years old, lives in Kuala Lumpur and earns a monthly income of RM 5,000. The question is, ‘Is FundMyHome.com a viable alternative for him to fund the purchase of his first property?’
Here are my views:
#1: Does it Make Home Ownership More Affordable?
First, there are two components needed to measure one’s ability to purchase a property. Let us use a property price point of RM 400,000 as an example. Most of the properties listed under FundMyHome.com are currently priced between RM 300,000 to RM 500,000.
To a first-time home buyer, he is eligible for 90% financing from the bank, thus, he would apply a mortgage of RM 360,000. Based on a lending rate of 4.5%, his monthly installment is RM 1,704 or 34% of his monthly income of RM 5,000. As it is well below 60% in debt-service ratio (DSR), he is able to qualify for the loan if he maintains a good credit score. That is the first component.
The second component is the 10% down payment and approximately 3 – 4% in transaction fees. In total, it is wise to set aside RM 60,000 in total upfront cost if one is considering to buy a property costing RM 400,000. For one who earns RM 5,000 a month, how much is he able to save? If it is RM 1,000 a month, he would take as long as 5 years to raise RM 60,000 for his property. That, to me, is the real issue – The Down Payment.
With FundMyHome.com, a first-time home buyer needs to fork out as much as 20% or RM 80,000 in down payment to buy his property. The remaining 80% is financed through peer-to-peer (P2P) crowdfunding which mainly include banks such as Maybank and CIMB. Also, the buyer incurs 3 – 4% in transaction fees for the purchase of his property. In total, he needs to have RM 100,000 in his bank account before purchasing a RM 400,000 property under FundMyHome.com.
Thus, I think FundMyHome.com is not helpful to make homes more affordable to its users at the moment.
#2: What is the Greatest Benefit for Using FundMyHome.com?
Supposedly, a first-time home buyer did manage to put down the 20% required for his property, he is entitled to move in and occupy his property for 5 years … without needing to service mortgage installments during the period. That is the biggest selling point of using FundMyHome.com to purchase your property.
Instead, excluding transaction costs, if you paid RM 80,000 in down payment to buy a RM 400,000 property, you would apply for a mortgage of RM 320,000. As such, your mortgage installment works out to be RM 1,514 a month.
In other words, with FundMyHome.com, you would saved RM 1,514 a month in mortgage payments over the next 5 years. Is that awesome?
In a glance, it appears to be. But remember, firstly, you can enjoy this benefit if only you are able to put down RM 80,000 plus 3 – 4% transaction costs for your home purchase, which is out of reach to most people who are earning as much as RM 5,000 in monthly income.
Second, it depends what would happen to these first-time home buyers after 5 years of owning their properties. It leads to:
#3: What If I Wish to Stay In My Property After 5 Years?
The crowdfunding period for each home purchase is set to be for 5 years. After the fifth year, the buyer can choose to stay on his property. However, he needs to refinance his property because the proceeds from the home refinancing will be used to pay back to crowdfunders who financed 80% of the initial purchase price of his property. Let me explain.
For instance, let us say 5 years later, the RM 400,000 property has appreciated to RM 480,000. If the buyer decides to stay on, he needs to refinance his home to buy over the 80% stake which were financed by his crowdfunders some 5 years ago. Hence, he would take on a new loan based on the latest valuation of his property which is at RM 480,000.
If we compare another who buys his property using a bank loan from the start, a buyer who uses FundMyHome.com may, in this case,
- Pay higher monthly installments with as his loan amount is higher.
- Pay higher interest costs.
- Pay higher legal fees for his loan agreement and stamp duty on it.
- Pay higher valuation fees.
- Pay higher MRTA costs.
That is only if he is eligible to qualify for a bank loan after 5 years. Thus, here is another question: ‘What if he is not eligible for a mortgage after applying for it from multiple banks in the future?’
Then, he has to sell his property which leads us to:
#4: What do I Get from Selling My Property?
From FundMyHome.com, I learnt that, if your property appreciates by 20%, for instance from RM 400,000 to RM 480,000, and you would not enjoy any sort of gains if you successfully sold your property after the 5-year period. The gains of RM 80,000 would be shared among the crowdfunders of your home.
From the sales proceeds, you would be given a net figure after deducting costs associated to the disposal of your property from RM 80,000 which was 20% of your initial down payment of the property.
Here is yet another question: ‘What if, your property value depreciates by 20% from RM 400,000 to RM 320,000?’ Based on the official table given, you would lose your capital. Your crowdfunders would recover their capital without a loss.
To be fair, if I bought a house and it depreciates by 20% in 5 years, I would lose all of my equity regardless, whether or not, I financed the purchase by having a mortgage or by crowdfunding from FundMyHome.com.
However, here is the difference between the two. By mortgage, I can choose to stay on my property as long as I service its installments. I do not need to realise my loss immediately. If the property market improves, I might even recover my loss in the future. However, with FundMyHome.com, I was not given an option but to dispose the property after the fifth year if I fail to refinance the house. In this case, I was ‘forced’ to realise a loss.
In this case, a first-time home buyer who paid RM 80,000 in down payment for his property would not only lose his capital but also his shot of owning a brand new property in the future.
#5: What if the Property Can’t Be Sold?
From FundMyHome.com, a buyer should be handing over vacant possession of his home after the fifth anniversary if a sale of the property fails to materialise. If a buyer chooses to occupy the property, he would be charged a rental rate of 5% per annum. Here, I have two questions:
- How much is the rent chargeable to the buyer? Is the 5% rate based on the initial purchase price of the property (RM 400,000) or is it based on the latest valuation of the property (RM 480,000)? Thus, the amount of rent payable would range between RM 1,667 to RM 2,000 a month.
- Who is the true owner of the property? After all, there is a risk where a first-time home buyer who would end up paying rent to stay in his own property.
Vote Mark Chua as Finance Minister
In short, I believe, the new initiative raises more questions than answering how it can help solve the issue of affordable housing among Malaysians.
The article above is inspired from a Facebook Post from Mark Chua, a banker, a seasoned property investor and the best-selling author of ‘Who Says’. From it, I believe that his remarks on P2P Home Financing valid and it ends with perhaps, a plausible solution to improve on the existing P2P offerings on home financing in Malaysia. To read Mark’s comments and suggested solution, the following is the link to his postings on P2P Home Financing.