Would P2P Crowd Funding turn into sub-prime crisis of the US? Part 1.
What is a ‘Subpime Mortgage’?
A subprime mortgage is a type of mortgage that is normally issued by a lending institution to borrowers with low credit ratings. As a result of the borrower’s lower credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate themselves for carrying more risk.
Having paid 20% borrowing from conventional loan – a RM400,000 (RM80,000 loan) unit of apartment (800 sqf) can be owned with 80% borrowing from the P2P Crowd Funding. That is simple understanding of what this is under 2019 Budget. Would the owner actually own this property? Not really.
You cannot fully own a RM400,000 property with just RM80,000. So, you move in and start paying the RM80,000 loan. Maybe, just maybe you need to repay it over 15 years, RM601.82 is the monthly payment at 4.25% annual interest rate of housing loan. For a young couple (B40) who earns RM1,100 x 2 = RM2,200, this is below ⅓ of the household income. So, the banks are safe and everyone is happy. According to more recent readings, this RM80,000 is to be repaid within 5 years! So, it is almost impossible looking at the likely category of borrower in this situation!
Then, after 5 years, you are to make a decision if you want to purchase this apartment. At the rate of repayment above – 15 years, the 20% is still not fully repaid yet at 5th year. Hence, unless you made better income, you will not likely be able to purchase the property which should by then appreciate to another new price – maybe RM450,000. The choice are three:
1. Convert to conventional housing loan for the property and own it like conventional mortgage.
2. Sell it in open market and share the profit with the Crowd Funding Company.
3. Appeal to watch and wait, continue paying the 20% loan. This might then incur penalty or other charges.
We shall continue this case.