If I can’t get a mortgage today, how are my chances improved in 5 years under FundMyHome?

Buying through FundMyHome rather than renting during the first five years puts you in a better financial position for a mortgage thereafter.

Continuing your journey as a homebuyer under FundMyHome, by Year 6, you would have accumulated RM60,000 or 20% equity in the home (see table below). Should you choose to apply for a 80% mortgage to buy the home, you need no further funds to meet the downpayment. This scenario assumes the home price is unchanged at RM300,000. Even if the home price rises, to say RM350,000, you would only need to top up RM10,000.

On the other hand, if you had stayed in a rented house through the first five years, you would have no equity in the home and would need to freshly raise RM60,000 towards the downpayment of 20% to purchase the same home costing RM300,000. If the home price has rises to RM350,000, you would need to raise a higher sum of RM70,000.

The reality is, you will NEVER be worse off with FundMyHome compared to renting. If the house price falls by 10%, you would still have positive equity value of 10% of the original house price. Even with a fall of 20%, you are not worse off than renting. 

The positive equity value created is what helps you to eventually own the home completely.

FundMyHome or a Mortgage?

The answer depends on your individual circumstances, risk appetite, mortgage terms, investment horizon and your expectations for how home prices behave over the five years.

To buy a 3-bedroom apartment costing RM300,000, a homebuyer under both options needs to pay RM60,000 upfront. Over the next  five years, with a mortgage, you need to keep up with  RM1,216 in monthly repayments. With FundMyHome, there is no monthly repayment.

By the end of the fifth year, with a mortgage, you would have paid nearly RM132,960 and still owe RM218,779.  Under FundMyHome, you would have paid only RM60,000 and have a balance of RM240,000 outstanding.  

Another way of looking at it is that the amount already paid plus the outstanding loan payable would be RM351,739 under a bank mortgage. Under FundMyHome, the equivalent amount is only RM300,000 or nearly RM52,000 cheaper. This is because much of the payments in the early years under a mortgage went towards interest.

However, should home prices rise by more than 17%, you would be better off with a normal mortgage. On the other hand, the risk of losses due to a fall in home prices is much higher under a mortgage. With FundMyHome, your loss is limited to the capital you invested, which is 20% of the original house price.

In summary, if you have the access to a bank mortgage, prefer not to share your capital gains and do not mind bearing all the loss as well, FundMyHome is not for you.

On the other hand, if you do not have access to a bank mortgage, are willing to share your capital gains and mitigate your potential loss, then FundMyHome may be for you.

Is it fair that the upside from any capital gains is mostly enjoyed by the developers while the first 20% of any capital loss is borne by homebuyers?

FundMyHome works because developers only receive 80% of the home price upon sale. The balance of 20% is only earned at the end of Year 5, provided the home price appreciates by 20%.  Otherwise, the developer forfeits the 20%.

That 20% is set aside to pay a fixed 5% interest rate to institutional investors over the 5-year period,acting to incentivise them. Without a fair return, it would not be possible to attract investors  to fund 80% of your home.

In short, the first 20% of capital gains paid to the developer at the end of Year 5 is a repayment of their 20% set aside upon sale of the home in order to pay the 5% interest rate to the investors.   Developers will never get more than the original selling price of the house.  Instead, they risk losing up to 20%, even if the house price stays unchanged.

FundMyHome aligns the interests of developers and homebuyers such that developers are incentivised to uplift the value of your property.

Landlords get richer if most Malaysians can’t afford their own homes

Frankly Speaking comment in the latest issue of The Edge Malaysia (Nov 12 – 18, 2018)

The issue is not availability. It is affordability.

That is why there are hundreds of thousands of unsold houses and apartments across all price ranges. Indeed, homes below RM500,000 make up around 50% of unsold residences. These include affordable homes built by the government via PR1MA.

There are two sides to affordability. On one side is income and access to financing, and on the other is the price of the home.

Home prices have rocketed in recent years while incomes have not. This is a structural fault of the economy that will take years and much pain to solve, if it can be fixed at all.

As a result, according to Bank Negara Malaysia, those earning an average Malaysian income can only afford to buy homes that are around RM300,000.

If we follow this guideline, most Malaysians should not and cannot afford to buy homes.

Renting is what the central bank encourages.

But renting does not build equity or savings for the future. The real winner, if most Malaysians choose to forever rent, will be the property owning class, who are likely to own multiple properties.

It will be a case of the well-to-do landlords getting richer while the less well to do and the poor become permanent renters, unable to build equity in the form of a property, if access to home ownership is restricted.

What are the solutions?

If incomes are too low while home prices are too high, the obvious solution should be to raise income by, say 25%, while also forcing the prices of unsold homes down by 25%.

Affordability would improve by 50% and all the unsold stock could be cleared and hundreds of thousands more Malaysians could own their own homes.

This is just a mathematical calculation. Economics and finance, however, do not work that way.

We know the damaging consequences of raising wages across the board by 25% in one fell swoop just to address the housing affordability problem. Same with forcing home prices down by 25% – it would destroy the value of all properties, not just the unsold ones, by the equivalent amount. It destroys wealth.

Because their incomes did not rise fast enough, many Malaysians resorted to bank borrowings to own their dream homes. This expansion in debt from 2009 to 2015 has made Malaysian households one of the most leveraged in Asia today.

This is why a solution has to be found whereby debt should no longer be the ONLY way for people, especially young Malaysians, to buy a home.

Under the newly launched FundMyHome scheme, in which equity put in by investors replaces lending by banks, first-time homebuyers will not be burdened with mortgage payments in the first five years of ownership.

This five-year breathing space is critical to allow them to build up their savings as their income rises, thereby enabling them to be in a better position to take up a normal mortgage later.

In short, FundMyHome gets them past the door into homes that they would otherwise be shut out of. This way, a home of their own may no longer be just an elusive dream for many young Malaysians from less well-to-do families.