Loan To Value (LTV) Ruling

Recently Bank Negara Malaysia (BNM) announced the maximum loan-to-value (LTV) of 70% which will be applicable to the third house financing facility taken by borrower. This move by BNM is to moderate the excessive investment and speculative activity in the residential property market.

I think this is what will happen:

1. Speculative activity will moderate but will not be eliminated. Even the developers say so. Most speculative activities are related to the high end residential properties. Speculators in general are those with lots of cash. They buy and flip in a year or two for quick bucks. Paying a 30% down payment for a residential property will not be so much of a burden to them. In fact, if they take up 2 loans per year and sell them off the next year, they will only need a 10% down payment for each property. They repeat the process and by taking up two property loans per year, the ruling might have negligible effect on them. I do think by having the tiered pre-2007 Real Property Gains Tax (RPGT) will have much more impact to speculators.

2. Those so to say genuine investors who invest for cash flow will be the most affected. These are people who buy and hold the property for some time and sell when necessary. To get the greatest yield for cash flow investment, minimum upfront investment is the way to go. But with this ruling, for the third and subsequent properties, the initial capital outlay will be bigger hence reducing yield. Although with bigger initial capital outlay, the monthly positive cash flow will be bigger, the yield will be much more smaller. This in turn will be decisive whether the investment is feasible or not.



3. Some parents do invest in medium cost properties as their child's education fund. When the child is born, they will buy a medium cost property with positive cash flow. When the child is about to enter university, they will either refinance or sell off the property to pay for the child's education fees. I was even thinking to do the same for my child's education fund. However, with the new ruling, this idea might not be feasible anymore with smaller yield. The money might be better off in other type of investments.

4. With shrinking yield for cash flow property investment, more and more people will switch to other type of investments. I think the greatest beneficiary will be the Real Estate Investment Trust (REIT). REIT in general could fetch yield between 5% to 7%. Even for a child's education fund, this investment certainly looks feasible.

To counter the ruling, here are a few ways which I think could minimize the effects on genuine property investors:

1. Buy a property under joint name of husband and wife but for loan application, just use one name. This way, a total of 4 loans will be eligible for 90% LTV (2 under husband's name and 2 under wife's name). The more wives you have, the more 90% LTV you'll be eligible to take (not recommended though).

2. After taking up the first property loan, save money for down payment of say 3 properties at one go. Apply for the second to fourth property loans at the same time but from different banks. It's likely that you'll get a 90% LTV for each loan (applicable until the ruling changes).

3. Cash flow property investment is all about yield. To maximize yield, the initial capital outlay shall be minimum. Therefore, use the 90% LTV for your first and second investment property purchase for positive cash flow. Take up the 70% LTV for property for your own stay. Ideally, property for your own stay loan should be settled as soon as possible. With higher down payments, the loan amount and monthly repayment are smaller hence you will be able to settle the loan faster.

4. If you have the means, do invest in commercial properties. The BNM ruling only covers residential properties. For commercial properties, it is still possible to get LTV of 80% to 85%.

Good Luck!