Multiple financing, which is also known as the compressed loan method entices many with the possibility of being an instant millionaire. However, the risk of becoming bankrupt and possibly jailed is way higher than any benefit the investor might reap.
There are many investors out there who aspire to be property millionaires. They read books, attend seminars and pay for courses. At some point or another, a property investor would have asked himself, can I get multiple loans for a house at the same time? Technically, you can try to do so. But most will get caught.
In a recent couple of years, there have been several posts that went viral on social media – detailing the consequences of compressed loans. Plenty of investors has ended up bankrupt overnight.
A few investors in Malaysia have committed suicide as they have racked up considerable debt from multiple financing, prompting them to end their lives. You would think such distressing news would be enough to deter others from venturing down the multiple financing route.
Nevertheless, new aspiring investors are still signing up for property “courses” that teach one how to use the compressed loan method to earn easy riches. Read on to find out why you should stay far, far away from such programmes.
What is multiple financing?
Also known as the compressed loan method, multiple financing is when one applies for a few housing loans at various banks, simultaneously. This ‘loophole’ is popular amongst investors who plan to purchase a few housing 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 property investors. 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 investors can use these ‘cashback’ monies to service their mortgages 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 housing 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 home buyers.
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 compressed loan method with his girlfriend as a joint property buyer, as his mortgage cannot be approved with just his income alone.
He succeeds in securing housing loans from 5 different banks.
2. Walking the path to bankruptcy
RM 1 million does not last very long – not with 5 monthly loan 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 renovations, to prepare the units he bought for property rental.
Now, after 8 months has passed, he starts to get worried – his RM 1 million is nearly gone. His units are renovated and ready for tenants, but unfortunately, have no prospects. With a monthly instalment 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 property valuation turns out to be 20-30% below his purchase price. Now, he can’t even sell them off, 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 cash back 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 like Jerry will not even receive a single cent from rental income after months of waiting for a tenant who is willing to pay the minimum monthly rent.
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 loan 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, 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 tough for you to receive any financing help in the future. Not to mention, being caught doing this is an offence and can result in a jail sentence. Many eager property investors assume that Bank Negara Malaysia and the Malaysian banks are not aware of this strategy.
This article was first published as "The dangers of multiple housing loan submissions for property financing" on iProperty.com.my.
The author of this article, Miichael Yeoh, has over 20 years of experience in property, mortgage and the investment industry.
You can read Miichael's outlook on the 2022 property market in 2022 Malaysia Property Market Outlook - Find Out What Industry Experts Predict.