Written for iProperty by Miichael Yeoh
Is being an instant millionaire worth the risk of becoming bankrupt and possibly jailed? Find out why you should stay away from the multiple financing or loan compression method.
There are many out there who aspire to be property millionaires. They read books, attend seminars and pay for courses. However, plenty of them end up bankrupt instead. How does this happen?
Two words: multiple financing.
What is multiple financing?
Also known as the “loan compression” method, multiple financing is when one applies for a few home loans at various banks, simultaneously. This ‘loophole’ is popular amongst investors who plan to purchase a few units/properties at one go, and avoid the 70% loan margin for the purchase of the third and subsequent properties.
The situation where multiple financing is used, is usually for “cashback” properties. Usually, these units are being sold in bulk to a group of purchasers. Hence, the developer is able to offer a massive discount for its units (as high as 40%), and each buyer will get a disbursement via a cashback amounting up to 6-figures per unit. This is possible as these cash-back properties usually have a marked-up selling price.
It is very attractive as buyers can use this ‘cashback’ monies to service their mortgage easily. In other words, you are ‘paid’ to buy the property from the developer. Furthermore, you can purchase multiple units with a maximum loan-to-value ratio using the loan compression strategy. By submitting various loan applications at the same time, you are actually cheating the system by receiving 90% loan for all properties, a rate that’s usually only reserved for first time buyers/first property purchase.
Sounds like a sweet deal, doesn’t it? And therein lies the danger of multiple financing:
1. Buying above your affordability
In a case study, Jerry (not his real name), who has a net income of RM5,000 decided to buy 5 properties in one go. Why? Because he was promised a cashback of RM200,000 per unit. He decides to go ahead and tries the compression method with his girlfriend as a joint buyer, as his mortgage cannot be approved with just his income alone. He succeeds in securing loans from 5 different banks.
2. Walking the path to bankruptcy
RM 1 million does not last very long – not with 5 property repayments to service. Most people, like Jerry, tend to use their cash for personal pleasures first – expensive cars, watches, jewellery and so on. Then, a chunk will go into home renovation, to prepare the units he bought for rental.
Now, after 8 months past he starts to get worried – his RM 1 million nearly gone. His units are renovated and ready for tenants, but unfortunately, have no prospects. With a monthly installment of more than RM12,000 a month, it is only a matter of time until he goes bankrupt.
3. Getting stuck with ‘deadweight’ properties’
In his desperation to recoup his losses, Jerry goes to the bank to check the value of his properties. To his bitter surprise, the actual valuation turns up to be 20-30% below his purchase price. Now, he can’t even sell them, as he has no money to pay for the differential sum.
Because of his greed in the beginning, Jerry did not realise that these sort of properties with high cashback packages from the developer, are usually located within an area that is not very attractive or is tough to score tenants. In some cases, buyers who are not as lucky as Jerry receive not a single cent.
4. Being blacklisted by banks
Nowadays, banks will do a double check before releasing the loan. If they feel that something is not right they can halt the release and ask for proof of documents. The banks have the right to do this under the law, it is also stated in the letter of offer that the borrowers sign.
Since your CCRIS report is updated on the 15th of each month, these unscrupulous buyers will submit several loan applications to different banks on the 16th to “beat the system”.
If you do get caught, the best-case scenario is that all your other loans will be automatically reduced to 70% financing. But it is very likely for you to be blacklisted – once you are, it will be very difficult for you to receive any financing help in the future. Not to mention, being caught doing this is an offense and can result in a jail sentence. Do you honestly think that Bank Negara and the Malaysian banks are not aware of this strategy?
For this “cash-back” scheme to work, you need a property coach and a student (buyer). The student is usually the one who suffers. They are promised so many things, but these are just promises and many of them are not documented in black and white – there’s no proof that can even be used to sue. I will not say that debt is not a good thing, but it has to be managed wisely.
Follow the right property educator, there are many ethical ones out there. You should not believe in the fast and easy way to riches – it is possible to gain handsome returns in the property arena, but do it legally and well within your means. Personally, if I do not have at least 12 months worth of mortgage instalments saved up, I will not even purchase the property I have my eye on. When things are too good to be true, take a step back and think again before you proceed.
Edited by Reena Kaur Bhatt