This article first appeared in The Edge Malaysia Weekly, on November 16 - November 22, 2015.

ALTHOUGH the government’s aim to increase homeownership among the middle class is laudable, the lack of access to financing is a big problem, given that the average middle-income earner finds it difficult to come up with the 10% downpayment.

Hence, the government over the last few years has introduced various types of home loan schemes to help this group of people.

Under Perbadanan PR1MA Malaysia’s affordable home scheme, eligible applicants may apply for a 110% loan from the agency’s panel banks. The additional 10% is to help the homebuyer pay additional items such as legal fees and insurance.

Meanwhile, other programmes such as My First Home and the Youth Housing Scheme provide loans of up to 100% to first-time homebuyers with income not exceeding RM5,000 a month, or in the case of joint buyers, household income not exceeding RM10,000 a month.

The government should be applauded for making it a tad easier for the public to own a home. But does this seem to go against the cooling measures Bank Negara Malaysia has taken to rein in high household debt over the last few years?

Simply put, it raises the question of whether the “easier” access to loans could cause a higher risk of default in the banking system.

Bank Negara governor Tan Seri Zeti Akhtar Aziz, who agreed that there is still a shortage of affordable homes, said they should be offered to those who are creditworthy.

“Of course, while we are promoting house ownership, it is only to those who can afford to own houses. We do not want to see individuals and families enter into debt that they cannot service because it will end up with the house being repossessed ... This is not a direction that we want to move to, but we do want to provide homes to the community,” she said at a press briefing after announcing Malaysia’s third-quarter GDP growth last Friday.

She opined that affordable homes should also be made available for rent, providing an alternative for those who cannot afford to take up a home loan.

Nonetheless, the banks stress that they practise equal prudence when approving loans for buyers of affordable homes.

OCBC Bank (M) Bhd head of secured lending Thoo Mee Ling clarifies that the riskiness of a loan is not determined purely by the applicant’s income level and number of outstanding loans. It also involves the health of the loans in the applicant’s Credit Bureau record and his repayment behaviour.

This means that a person who earns RM5,000 a month may not necessarily be a higher risk compared with a person who earns RM20,000 a month.

The common perception that loans for affordable homes are dished out more easily should be eliminated. According to Thoo, the credit assessment of loans for affordable housing schemes such as My First Home is the same as for other mortgage applications.

“OCBC Bank uses a combination of risk acceptance criteria to determine the creditworthiness of loan applicants. These include factors like debt-servicing ratio, sources of income, the customer’s profile, Credit Bureau track record and loan-to-value ratio. Ultimately, these are also weighed against the responsible lending guidelines [set by Bank Negara],” says Thoo.

Meanwhile, RHB Banking Group head of group retail banking U Chen Hock says the bank has approved only 15% of loan applications for My First Home since it was launched. It is mostly because the applicants had insufficient income to meet financing and debt-servicing requirements. Poor credit history is another factor, he adds.

According to U, RHB has not seen any significant default rates so far among those who succeeded in getting their loans.

CIMB Group CEO of group consumer banking Renzo Christopher Viegas notes that creditworthiness for home loans is assessed based on factors such as the customer’s repayment history, credit score, repayment capacity and debt service ratio. He says the criteria for the bank’s My First Home loan are broadly similar to those for normal housing loans.

The National House Buyers Association honorary secretary-general Chang Kim Loong is strongly against the home loan schemes for affordable housing, saying that giving the buyer a 100% loan with “free legal fees and stamp duties” does not give him an understanding of the home-buying process.

“To buy a house, you must have commitment. When you get everything for free [or easily], you tend to buy a property without a sense of responsibility. If you don’t have the 20% downpayment, don’t buy the house. You should be borrowing as little as possible and not bind yourself as a slave to the bank. If you lack the sense of responsibility, [there is a high possibility that] you will be a defaulter,” he says.

According to IHS Asia-Pacific chief economist Rajiv Biswas, the risk of a housing bubble related to government support schemes would depend on the types of incentives provided. He says the risk of default on home loans can be reduced through a combination of sufficient collateral requirements and risk-mitigation products.

“An important aspect of addressing moral hazard related to such affordable housing schemes is ensuring that even low-income households have to provide some collateral. In some countries, a limited amount of the collateral can be provided from pension fund savings,” he says.

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