Why banks are being fussy about who they lend to?

We heard banks have been cutting interest rates… How is this beneficial to us consumers? Why are we facing more problems getting a loan? Well… regardless of what central banks around the world do with interest rates, banks are no longer keen to lend during this recession. Why’s that? Simple – because property prices aren’t rising any more.

Back during the good time, property pricing had sky-rocketed. Banks are out to lure customers by creating ever-riskier products to win. They fought each other for market share by slashing profit margins to the bare minimum and giving consumers plenty of choices to choose… People saw the potential on the upside of the value, start snatching up property, creating a big Seller market!!

And if that’s the over-riding assumption, then actually, a 125% loan isn’t really ‘madness’ at all. If you assume and believe that property prices will keep rising, then it won’t be long before that 125% loan has shrunk to a 100% loan, compared to the value of the house. So if house prices are rising, then who needs to ask for a deposit? The equity will build up very rapidly, even without any money being put down.

Think it this way, during good times, when you are making money, the Banks are making more money. They are not worried about customers defaulting payments as they have already factored the risks into profit. After all, if consumer fails to pay the bank, it can just take possession, and resell to the open market with a hefty profit again. It’s a no-brainer – as long as you accepted the flawed assumption that house prices would always rise in the first place.

Of course, that wasn’t the case. As we’ve always said – investing in real estate is all about financing – it turns out that the most important supply and demand variable for the housing market is the supply and demand of credit, not of property. And that’s why it’s going to take a long time for prices to recover, or even to bottom out. Because banks won’t be keen to lend any time soon!!!

Banks are now playing the safest game. After seeing so many big banks collapsed, it is a painful lesson to banks. So be prepared now that bank will expect the consumer to cough out at least 20% down-payment, so they loan less and minimize their exposure if you want to buy a property in this crisis…

It’s no longer just about the price of deals or the size of deposit you need. Lenders are becoming much more picky about their criteria – almost looking for excuses not to lend, some might say.

Look at what has happened in UK:
“Mortgage brokers have cited examples of borrowers being refused a mortgage because they had paid a mobile phone bill a few days late, or because they had opened a number of different savings accounts, which had triggered multiple credit searches from banks.”

And in Singapore, too, banks now refuse car loans as the number of repossession has increased significantly. According to banks they can’t find enough space to park repossessed vehicles.

Will the same thing happen in Malaysia???

Well, we doubt the banks here are efficient enough to search borrower’s mobile phone bills and we have plenty of space to park vehicles. But, please put on your seat belt and hold real tight, it is going to be a rolling coaster ride in this challenging year 2009!!!!.


About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.


  • KCLau

    Reply Reply January 5, 2009

    Some banks has shown the sign earlier than others. When I bought a new property (only 2 months from obtaining OC) in October 2008, HSBC refused to loan because the developer is too small, and not listed in their A-list developers. Ironically, HSBC loan the money to a buyer 2 years ago, on the same project!

    We finally turned to Public Bank and the loan is approved without much hassle, even with a better rates. I think international banks are more cautious.

  • ongkl

    Reply Reply January 7, 2009

    Foreign banks were famous with their “daring” policy of housing loan before the financial crisis. After August 2008 we found out that local banks are more willing to lend. Among them Public Bank and CIMB are now recommended by mortgage brokers.


  • Fauzi

    Reply Reply February 13, 2009

    I bought a prop last month, HSBC giving me 80% margin, CIMB and Alliance, 75%.. Absolutely they cautious on the pay master capabilities. In order to challenge that, they test potential borrower with low margin.. Sigh.. less money to invest in near future.. 🙁

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