DANGER: Differential loan schemes can lead to bankruptcy DANGER: Differential loan schemes can lead to bankruptcy
Share this on WhatsAppVIEWPOINT – The National House Buyers Association The recent announcement by the Minister of Urban Wellbeing, Housing and Local Government Tan... DANGER: Differential loan schemes can lead to bankruptcy

VIEWPOINT – The National House Buyers Association


The recent announcement by the Minister of Urban Wellbeing, Housing and Local Government Tan Sri Noh Omar on the eligibility of property developers being given money lending licence has raised some serious concerns which the National House Buyers Association (HBA) must address.

In the proposal, supported by the Real Estate and Housing Developers’ Association (Rehda), it was explained the purpose of the licence is only for the developers to lend money to buyers as a “bridge” for downpayment on their home purchase and not as a full loan as speculated, claiming that “most banks today will only give margin of financing of 80 per cent compared to 90 per cent previously”.

Despite the clarification, HBA reaffirms its earlier view that this proposal is still detrimental to the house buyer and property industry at large.

Valid reason for reduction in margin of financing

While on the surface it seems that the developer is trying to help the house buyer purchase his/her dream home, there are valid reasons banks do not give the full 90 per cent margin of financing. These are either (i) the property is overvalued or (ii) the borrower is not creditworthy because his salary is too low or he already has too many existing credit commitments, or a combination of both reasons.


If the banks opine that the house buyer/borrower will not be able to service the full loan or the property is overvalued, they will reduce the loan amount to reduce their risk. Banks are in the business of giving loans and will want to maximise the loan disbursement whenever possible. If the house buyer gets a margin of financing of 80 per cent instead of 90 per cent, then the house buyer must take this as a message that the property he/she wishes to buy is beyond his/her income and should look at a more affordable one.

Much higher monthly interest and repayments

The loan that Rehda is referring to in the banking circle is actually not a “bridging loan” but a “differential sum loan” which is the difference between end-financing and the purchase price of the property less the traditional 10 per cent downpayment.


As the property will be secured for the end-financing loan, a differential sum loan is typically not backed by any collateral.

According to the housing minister’s statement, developers are allowed to charge up to 18 per cent per annum for unsecured loans. This means that the house buyer will have to repay much higher monthly loan repayments in the form of end-financing and the differential sum loan.

To illustrate, Mr ABC wants to purchase a property worth RM500,000 from the developer and after paying the 10 per cent downpayment, the financing required is RM450,000 or 90 per cent margin of financing. The monthly instalments he would need to pay are shown in Table 1.

If Mr ABC gets his 90 per cent loan, there is no problem. But if he gets only 80 per cent loan, then he must pay the differential sum of RM50,000 or abort his purchase. So, the developer comes in with the differential sum loan which appears to help Mr ABC buy his dream home.




The interest rate for this differential sum loan has yet to be announced although it is capped at “not exceeding 18 per cent” under the Moneylenders Act. Interest under the Moneylenders Act is also calculated upfront and does not reduce as the principal sum outstanding is reduced compared to a housing loan that is calculated on a reducing balance basis.

Hence, the effective interest rate for loans under the Moneylenders Act is much higher.
Bank Negara Malaysia has also set a cap of 10 years for all personal financing schemes. We have calculated a few scenarios of the monthly repayment required for a RM50,000 loan under this differential sum loan.

Higher risk of default and bankruptcy

As we can see from Table 2, by taking the differential sum loan and end-financing together, the house buyer’s financial stress is much higher as the combined loan repayments are much higher compared to 90 per cent margin of financing.



Hence, a house buyer who takes part in this differential sum loan scheme could default in the future as the person will not be able to keep up with the financial obligations in unforeseen emergencies. As the differential sum loan is not secured against the property, the licensed moneylender cum developer can sue the house buyer for bankruptcy and seize all the house buyer’s unencumbered assets.

Check loan eligibility first

All aspiring house buyers should check their loan eligibility with the banks before paying any booking fee or downpayment to the developer. The banks will be able to advise the borrower whether he/she will be eligible for 90 per cent margin of financing based on the borrower’s risk and credit profile and location of the desired property.

House buyers must never be pressured into buying and paying any monies to any developer before checking or risk losing the booking fee or downpayment if they subsequently abort the transaction due to their inability to secure the full 90 per cent margin of financing.

Rent first, buy later

An alternative is for aspiring house buyers to put off their purchase until the economic situation is better or their credit profile improves. There is no shame in renting given the current economic uncertainty.

They can use this opportunity to hunt for good rental bargains and conserve their “war chest”. As more aspiring buyers put off their purchase and rent, developers may even reduce prices to dispose of their unsold units.

Inherit properties, not loans

Malaysia is facing an impending housing crisis. A large segment of our population, from the lower- to the middle-income bracket, especially the younger generation, is finding it very difficult to afford their own homes.

Government-linked Khazanah Research Institute’s Making Housing Affordable report shows average house prices in Malaysia are more than four times the median income, which makes such properties “seriously unaffordable”.

The differential loan scheme will only benefit those moneylenders cum developers as it will allow such developers to unload their property products on unsuspecting house buyers, many of whom will face financial difficulty in the future as they have to service the differential sum loans’ astronomical interest rates.

It is prudent for house buyers to do all the checks before buying a property. Buy one that is within your income and means and always save for a rainy day. HBA wants our children to inherit our properties and not our loans.


Know Your Rights:

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Off Jalan Imbi, 55100, Kuala Lumpur
Tel: 03-2142 2225 | 012-334 5676 Fax: 03-22601803
Email: [email protected]

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