Bring back DIBS? No, thank you

By Khairie Hisyam

Controversial property financing scheme DIBS, also known as the developer interest-bearing scheme, was banned last year after four years of consideration by Bank Negara Malaysia. But some birds in the jungle are chirping for its return, which Tiger is roaring against. Here’s why.

So Penang chief minister and Democratic Action Party (DAP) secretary-general Lim Guan Eng has again urged Bank Negara Malaysia to reinstate the controversial developer interest-bearing scheme (DIBS). Tiger thinks that is a bad, bad idea.

Lim’s call was made following the upward revision of the central bank’s overnight policy rate by 25 basis points, the first in three years.

“DAP opposes any hike in interest rate that would burden borrowers without any compensating measure to help them to repay or service their loans,” said Lim in a statement last Friday. “Reinstating the DIBS for houses below RM400,000 would benefit first-time buyers and promote housing democracy.”

For the uninitiated, the scheme essentially exempts homebuyers from paying interest on their mortgage while their purchased home is under construction as the interest costs — claimed to be borne by the developer — had actually been priced into the home sale price.

Lim Guan Eng

“This allows buyers to purchase their houses by paying 10% (for down payment) and giving them breathing room by not paying interest payments and rent at the same time whilst waiting for their houses to be completed,” argued Lim.

But allowing this scheme back into the market after it was banned last year would be a regression. While there had been much debate over its pros and cons, to Tiger the bad outweighs the good.

But the negative that directly dispels Lim’s argument that the scheme aids homebuyers is that DIBS capitalises interest — something that Bank Negara completely banned in November last year after DIBS’ initial ban.

Paying more in the long run

Let’s illustrate this with a simple example. Say Tiger buys a RM400,000 house and takes out a home loan with a 90% financing margin at a fixed 4.5% interest for a 30-year tenure.

Tiger’s financing amount would be RM360,000. Now let’s assume that Tiger’s house takes two years to finish. For the sake of simplicity let us assume that the loan is disbursed in full at once at the start of the two-year wait.

For the first two years, an online home loan calculator tells Tiger that the interest costs would come to RM31,895.58. Over 30 years, Tiger would have paid RM296,664.16 in interest in addition to RM360,000 in principal amount.

Now let’s think about how DIBS changes that.

Say a developer tacks on RM31,895.58 to Tiger’s purchase price, bumping it to RM431,895. A 90% loan-to-value (LTV) ratio places Tiger’s borrowed amount at RM388,706.

Based on this figure, over 30 years Tiger would be paying RM388,706 in principal plus RM320,319.83 in interest.

The difference is RM23,656 in interest costs, plus an additional RM3,189 in down payment. So the cost of DIBS, in Tiger’s simple example, is paying an extra RM26,845.

It may not seem like much compared to the overall price, but Tiger highlights here that the difference calculated above is based on a very crucial presumption that the developer bumps the price up by the exact interest cost for the two years it takes to build the property.

Now if an unscrupulous developer decides to price in more than what he should, the buyer loses even more. And who will be checking the priced-in interest to ensure that these unscrupulous developers won’t be making a little extra on the side?

Where lies our focus?

In any case, paying extra in such a way makes the stated intention of ‘helping’ homebuyers ring hollow to Tiger’s ears.

It may be argued that the difference is the cost of being able to afford the purchase while renting in wait for the keys. The case may be that DIBS would bridge the gap between what first-time buyers can afford and how much homes cost to purchase.

But if this is the driving reason for bringing DIBS back then priorities are misplaced in Tiger’s view.

The focus should be on providing more products at the right price, products that first-time buyers can clearly afford, rather than artificially trying to match buyers with homes that are slightly bigger than their pockets.

Now if Lim wishes to help first-time home buyers so that they do not have to bear interest payments during construction while at the same time paying rent, there is a better way — lend his weight to the build-then-sell (BTS) concept.

This concept had been much-talked about before since former housing minister Chor Chee Heung’s time, supposedly set for implementation next year. It’s not clear what form it would take, but the heart of the concept is that developers need to build first and only then sell, compared to the current sell-then-build process.

Now there are two types of BTS — a full BTS or a 10:90 formula.

For a full BTS, developers cannot sell their properties until it is fully completed with the Certificate of Compliance and Completion (CCC) issued. On the other hand, under the 10:90 concept — adopted in countries like Singapore and Australia — developers can sell before or during construction works but only 10% of the property price need be paid, which is the down payment.

So in terms of interest rates during construction, BTS removes that completely from consideration because buyers only need to take out home loans after the property is completed.

Or Lim could lend his political weight on pushing the National Housing Council (NHC), announced during last year’s budget speech by the prime minister, to intensify its efforts in increasing opportunities for the people to own houses.

Or Lim could also lend his political weight on pushing Putrajaya to consolidate Malaysia’s scattered housing initiatives into one cohesive effort that would be much more effective in providing affordable homes, as this Tiger has called for before.

Or better yet, Lim’s Penang administration can help more directly by sourcing very cheap land for the 1Malaysia People’s Housing Programme (PR1MA) to build affordable houses on. The Penang government can even be PR1MA’s joint venture partner in doing this to ensure lowest cost possible.

The possibilities are endless, even without DIBS.

GRRRRR!!!