Real Estate Tips #20: Subprime loan crisis, the after thoughts...

This is what happen in United States, i.e. if you cannot qualify for loans or are having difficulty obtaining credit through the normal channel, then a subprime loan may be your next port of call. A subprime loan is a loan that is given to people with a bad credit record. The interest rate on a subprime loan is likely to be a lot higher than an interest rate you would expect on a loan from a bank.

In Malaysia, the closest to its kind is probably credit company. However, this kind of credit loan is usually smaller in amount and is not widely used when purchasing real estate in Malaysia unlike its peers in United States. Once defaulted, as with the case with "loan-sharks", it creates more social issue rather than economic issue.

What I'm more concerned with is the so-called "Full-Loan" package the developers are offering in the market for the past few years. Yes, you can now own a house by paying a nominal sum of probably RM500. The developer can achieve this by marking up the true selling price of the property by 10%, enabling the buyer to obtain 100% loan, or full-loan so to speak. Unlike the conventional way of buying houses, where the buyer used to fork-up minimum 10% downpayment for the house price, this new marketing strategy has given more people (even the less affordable ones) to own a house at an earlier stage.

As a result, the banks now loses their comfort zone of this 10% of the house price. Once defaulted, the borrower may still owe the bank's a considerable sum of money even after the property is being auctioned. In other words, house buyers today are much more heavily-indebted as compared to the conventional ones. They are also exposed to higher risk on variation in the interest rates, i.e. Base Lending Rates.

Spending future money seems to be the trend now. Even when we buy a few thousand mobile phone, some still opt to pay by installment, thanks to the bank's "zero-interest" repayment scheme.

We are in the midst of building another economic bubbles, which we don't know when it will burst. But if it does burst, are we then prepared for it?