Bank Negara clamps down on pre-approved housing loans, mortgages, personal loans

In a move to curb spiraling household debt, Bank Negara Malaysia announced today a set of measures including pulling the brakes on pre-approved loans by housing developers, a feature which has allowed many Malaysians to buy properties they could not really afford on their wages.

The move by the central bank to reduce the length of mortgages and consumer loans follows concern in Putrajaya and the private sector that many Malaysians were living beyond their means, piling on debt that has been galloping away at an annual rate of 12 per cent over the past five years.

Effective today, mortgages will be capped at 35 years and personal loans at 10 years.

Household debt has continued to increase at a strong pace, averaging at an annual rate of 12 per cent over the recent five years.

Bank Negara said that while this has been supported by positive income and employment conditions, there has been a “growing trend in the offering of financial products that are not in the long-term interest of consumers”.

This includes extended financing tenures of up to 45 years for house financing and 25 years for personal financing.

The central bank noted that while this extended mortgage periods may reduce the monthly repayments, in the long run, this increases the overall debt burden of households.

Such practices encourage households to accumulate more debt.

In addition to the measures announced today, the central bank said that it will step up efforts to educate first-time borrowers on financing.

It also expected the banks and financial institutions to do their part in the fight against household debts by making sure that there were sufficient buffers to protect Malaysians against rising costs and adverse effects.

“This is a mild tightening as bank loans grew at a rate of 12 per cent for the first five months of the year, the household debt to GDP ratio is too high and the central bank had to implement these measures. I expect some knee-jerk reaction to banks and property companies as a result of these measures,”  Dr Yeah Kim Leng, the chief economist of Rating Agency of Malaysia (RAM) Holdings Bhd told The Malaysian Insider.

Politically, the authorities had little choice but to act on household debt. The reason: a large segment of Malaysians are suffocating under debt and this includes youth, graduates, civil servants. Most of them earn RM3,000 and below a month.