Will Banks Cap Housing Loan Quantum?

Bank Negara Malaysia is thinking seriously of imposing a  loan-to-value ratio (LVR) for mortgages at 80 per cent to avert the risk of a potential property bubble in the country.

It is seeking feedback from banks on the possibility of doing so.

Currently, there is no fixed LVR. Banks usually lend up to 90 per cent of a house value, or even up to 100 per cent in some cases.

A banking analyst at a local research house thinks this is unlikley thta bank is going to support BNM's move as it will affect their profitability.

Still, BNM is likely to be mindful of this and if it feels that such a move is necessary to curb property speculation and a potential rise in non-perfoming loans, it may reach a compromise in that it may not slap the 80 per cent cap across the board, he pointed out.


"We believe that it is unlikely that BNM will enforce a strict capping of LVR across all residential property classes, but rather impose a restriction only on higher-end properties where the speculative element could be more apparent," OSK Research said in a note to clients yesterday.

Kenanga Research said it wouldn't be surprised if BNM implemented the 80 per cent cap on, at least, properties valued at more than RM500,000.

The central bank's concerns about a potential bubble are warranted, interest rate hikes this year, loan growth has remained robust while deposit growth has lagged, due in part to the channeling of retail deposits into property purchases.

Residential properties currently account for 26.6 per cent of total industry loans.

Still, OSK felt that it was not feasible to set a blanket enforcement on the LVR, pointing out that residential properties were considered one of the safer asset classes for banks to lend to, with promising growth prospects underpinned by the country's relatively young population.

As it stands, it is understood that most banks already have an internal risk control policy, limiting the LVR to 85 per cent for higher-end residential properties valued at more than RM700,000. Most banks also have a LVR cap of 85 per cent for non-residential properties.

OSK noted also that LVR was just one of several criteria that banks use in their credit scoring process. They also tend to look at the debt servicing ratio, location of property and the borrower's other financial backing.

Meanwhile, any mortgage restriction is also seen to be negative for the property sector. Kenanga Research said it is likely to downgrade the sector from a "trading buy" now if the restrictions are implemented as property transactions will fall since deposit requirements will basically double.

"If the LVR is official at 80 per cent for all borrowers, we see a negative impact on the property sector, especially on the low- to medium-end market as housebuyers will need more equity under the new scheme," said Maybank Investment Bank research.

For example, a housebuyer would need RM80,000 instead of RM40,000 as equity for a RM400,000 house. "This could cause a delay in purchasing decisions," it noted.

RHB Research, meanwhile, felt that first-time home buyers should be exempted from a higher down-payment ratio since the government has been encouraging home ownership.