How Does GST affect Property Purchasing Process?

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No hotter topic than GST at this moment with less that 48 hours to go. It’s challenging and when google search  research was done on the web for few days, found that many discussed the impact and possible effects of GST on the property market. What we would like to discuss will be the direct impact on every steps on the Property Transaction process.

GSTProperty

Kindly refer back to the earlier discussion for the process of purchasing a property : https://ethanetteh.wordpress.com/2015/01/29/what-should-i-do-next-buying-a-property/

  1. Placement of Booking
    1. No GST to be charged at this stage as no actual transaction taken place yet at this moment.
  2. Application of Mortgage Loan
    1. If there’s payment of processing fee to be made, the processing fee is subjected to GST, but at this moment no processing fee is charged and therefore no GST involved.
  3. Acceptance of Loan
    1. At this stage, most of the time, no charges involved unless the set-up fee charged by bank for Flexible Loan (Typical amount: RM 200), this Set-up fee is a service charged by Bank and therefore is subjected to GST. Subsequently the monthly maintenance charge (Typical amount: RM10) or redraw charge (Typical amount : RM 10 to RM 50) are also subjected to GST.
    2. Besides that, mortgage protection plan, MRTA or MLTA also signed at this stage and since both are life insurance, no GST should be charged unless Critical illness or others riders included.
  4. Valuation Report
    1. Valuation report is required only for Sub-Sale of completed property. The valuer needed to provide a valuation report for the Open Market Value of the property to bank and the valuation fees will be subjected to GST.
  5. Signing of Sales & Purchase Agreement (SPA)
    1. Up to this part, all the above involve both Residential (GST Exempted) and Commercial Properties. For the discussion below, only commercial properties which are subjected to GST apply unless otherwise stated.
    2. During signing of SPA, purchaser will pay the down payment of 10% and this is part of the transaction, therefore, the down payment is subjected to GST.
    3. The Legal Fees for SPA documentation and Loan Documentation are also subjected to GST, but this is merely to replace Gov Tax charged earlier which is also 6%. The Memorandum of Transfer (M.O.T) and Stamp Duty payable to land office will be excluded for GST.
  6. Commission to Real Estate Agent
    1. Commission payable to Real Estate Agent is subjected to GST. For the common practice in the market, the booking fee paid by potential purchaser is normally treated as commission to Real Estate Agent, this will cause some complication as Seller will need to pay GST for the amount of Commission or brokerage fees paid to Real Estate Agent. (Regardless Commercial / Residential Property because this is payment of commission to brokerage agent) (for more details: http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/Guide%20on%20VALUERS%20APPRAISERS%20and%20ESTATE%20AGENTS%2031102014.pdf} )
  7. Interim/Full Payment to Seller
    1. Either under construction or completed property, for ease of discussion, every time a payment is done to the seller, the purchaser will have to pay GST. i.e. in the event of completed property, when Bank pay the balance sum to seller, purchaser will have to pay the GST of that amount.
    2. In the event the property was under construction, the scenario is still the same, whenever Developer invoices for interim payment, the purchasers will have to pay the GST. This also apply to property which is currently under construction which has not been fully paid up even though the property was purchased 2 years ago.
    3. Example. Mr K purchase an office unit in year 2014 and is 60% completed. The next stage billing comes in the month of May 2015 (10% of the purchase price), bank will release the 10% as the loan was offered earlier but Mr K need to pay the GST for that 10%. With this, Mr K actually need to prepare additional 6% for the remaining 40% which is additional 2.4% of the initial purchase price. At the moment when this article was written, no banks is financing GST.
    4. For more details, refer to Guideline from Royal Malaysian Custom Dept. : http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/Revised/Guide%20on%20Property%20Developer%20%20updated%20draft%20as%20at%2011%20Mac%202014%20-%20amended%20_1.pdf

Residential property was listed under Exempted Item for GST which is different from Zero Rated Item. For Exempted item, input tax could not be claimed, hence, it will be transferred to end-user even the final price is not subjected to GST. Item 5 & 7 discussed above do not apply to residential property.

*For reference and discussion only. Discussion was made with understanding of author on the material available. Kindly email to ask@ethanteh.com for further discussion.

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4D Betting – Betting for Wealth? Greed or Hope?

Since holiday is coming and let the discussion diverted slightly from serious topic. What prompted me to discuss about this was the phenomenon observed on draw dates for 4D betting in Malaysia. Normally these area will be slightly congested especially during few hours before bet closing time on draw dates. Some of the hawkers will also set up their stall near to these shops on draw date.

4D betting in Malaysia take place around 3-4 times a week.

4D Logo

What is the reason for these customers to place their bet? Is it due to Greed? Everyone would like to get rich without having to work? Do we really think that the desire to become richer is Greed? Or is it because the method to become richer by placing a bet is considering greedy because the amount of effort placed is less?

Would it be HOPE? Would it be they are actually buying a HOPE. By placing a bet of RM 1, one is hoping that he/she could win RM 50 ~ RM 2,000. Multiply the amount by 10 or even 100, that person still could not be rich enough to stop working. It is just a hope of winning some to lessen their burden for a period of time or loosen their financial stress for a period of time. How often we heard of a story that one become wealthy enough to stop working and enjoy a life after winning a 4D bet. But still the story of a single person could inspire thousands, ten thousands or even hundred thousands of others who have not win any for their whole life to continue to pay for the HOPE.

A lot of people are willingly squeeze the budget to buy a hope. How high is that hope actually? Statistically, the winning of 1st prize is 1:10000 and by betting the correct 4D, one win about RM 2,500. Statistically in order to win RM 20,000, one will have to bet RM 8 for each betting date at 3 different operators in Peninsular Malaysia which sum up to RM 24 for a chance of 0.01%. Multiply by 3 draws and 4 weeks a month, it will sum up to RM 288 a month.

Now, let’s face a reality of life. The probability of getting a cancer in Malaysia by age of 75 is 15%. Or we could calculate new cancer cases in year 2012 over 29.3 Millions of population in Malaysia, the probability stands at 0.13%. This is 13 times higher than the chance of hitting 4D. With the same budget, one can prepare an emergency fund of RM 1 Million per year and could include other financial threatening possibility. Further to that, most of the time, the money invested for this risk mitigation plan come with certain saving. (Statistic from : Malaysian Cancer Oranisations and Resources)

The purpose for this post was not intended neither to against anyone/anything nor promoting betting.

*This post was started before Chinese New Year season, but wasn’t completed until today. Since it’s completed now, just for reading pleasure. Next discussion will be on GST on property.

What should I do next? – Buying a property

To a first time property buyer, one could be confused and worried about the process to obtain a mortgage loan after confirming a property. We understand that the process could be complicated and confusing to many. Therefore, in this article we will highlight the steps involved.

Process

  1. Placement of Booking
    1. Purchaser normally place a booking through a real estate negotiator/owner (subsale-readily completed property) or developer (under-construction property) after a few viewing and satisfied with the property chosen.
    2. Normally a booking form/sales form will be issued upon confirmation and agreement by both buying and selling parties on price, terms and conditions.
    3. Typically a booking fee will be needed from Purchaser at this stage. (normally 2%-3% for subsale and as determined by developer for under-construction property)
  2. Application of Mortgage Loan
    1. Purchasers will normally have 14 – 21 days to source and secure for mortgage loan prior to confirmation on the purchase.
    2. Purchasers can do this through mortgage advisor or bank. Application can be done concurrently through several banks or financial institution. No cost involved for application according to the industry practice at this moment.
  3. Acceptance of Letter of Offer
    1. A Letter of Offer (LO) will be issued by financial institute if purchasers meet the borrowing criteria of their institution.
    2. Purchaser has the option to compare and understand the differences between different terms and conditions offered by different financial institution.
    3. Purchaser will then acknowledge the acceptance of the offer by signing the LO. A copy will be given to Purchaser for safekeeping.
  4. Sales & Purchase Agreement
    1. Purchaser could then proceed to sign the Sales & Purchase Agreement which confirm the purchase of the property.
    2. During this time, the purchaser will need to pay the balance down payment which sum up to 10% of the purchase price (the booking fee paid earlier should be considered as part of the down payment)
    3. This will be done at appointed Legal Firm. Purchaser will be required to pay the legal fees involved and stamp duty (or Memorandum of Transfer-MOT) during the signing. It could sum to 2.5% or higher of the purchase price. (The sum mentioned is merely for reference as it differ from case to case).
  5. Loan Agreement
    1. This is a separate agreement from Sales & Purchase as this is an agreement between Purchaser and Financial Institution for the loan granted for the property.
    2. This could sometime be done together with SPA if the same legal firm appointed and time allowed.
    3. During the signing too, purchaser will be required to pay the legal fees and stamp duty for this agreement. This would also sum up to around 2.5% of the loan amount. (Again this is merely for reference only)
  6. Own Your Property
    1. Purchaser will normally be informed by Legal Firm when all the processes completed and the property is ready to be handed over to purchaser.
    2. Another indication that a purchaser is about to take possession of the property will be the notice from financial institution with regards to full disbursement of loan and start of monthly instalment.

The flow discussed here is the simplified process without in depth discussion on matters that could arise throughout the process. Details in each process will be discussed in near future.

Feel free to contact us at ask@ethanteh.com for further clarifications or mortgage loan application.

What does a Mortgage Advisor/Broker does? When to see one?

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Many of the public has yet to know that there’s a group of Mortgage Advisers who work independently from bank to advise and assist client on mortgage loan application for property financing/refinancing.

Instead of being attached to a particular bank, mortgage advisor work independently and normally attached to some firms with license from certain banks as their sales representative. Mortgage advisor would then working as associates with the firm after meeting training and certain certification requirement as set by the bank.

As mortgage advisor, at most of the time, will assist client to do application to more than one bank to increase the chances of approval and for comparison of better offer from different banks since at this moment, there’s no processing charges for mortgage loan application. Also at this moment, there’s no charges to client from Mortgage Advisor but Mortgage Advisor earned the referral fees from whichever bank that secure the client.

When you should see a Mortgage Advisor?

  1. Whenever you need to apply for a property financing and do not have much time to see different salesperson from different banks.
  2. When you want to find out the loan eligibility before you search for the right property.
  3. When you need advice about restructuring of loan and find out more about existing property loan.
  4. When you need an unbiased advice regarding property loan. – “There’s no best product, but there’s product that best suit you”

When you should go to bank instead of Mortgage Advisor?

  1. Mortgage advisor needs full documents and cooperation from client to understand the client’s situation, needs and suitable package/banks. If client is unwilling to disclose or provide income documents, client should opt to visit the bank personally and preferably the existing bank that the client is maintaining the account as most of the information is readily available to them. However, this will limit the client to accept whatever offer made by that specific bank.
  2. Most of the Mortgage Advisor only representing certain bank/financial institution. If client has specific preference on a bank that is not represented by the Mortgage Advisor.

If you are interested to join us as Mortgage Advisor, kindly email you resume to: career@ethanteh.com

Why Base Rate (BR) instead of Base Lending Rate (BLR)?

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With year 2015 approaching, many were concerned about the implementation of new interest reference rate for mortgage loan; Base Rate (BR) which is replacing Base Lending Rate (BLR). Many started to worry about their existing mortgage loan and more were advised to expedite their application of mortgage loan in order to secure a “BLR Minus” package as the new package after the introduction of BR will be “BR Plus”.

BRBLR

While this is true, there’s no need for panic and we believe many were actually confused and misled by many in the industry including bank’s salesperson. BR was meant to be more transparent and let borrowers know the actual profit banks are making and more reflective of market condition from time to time.

One of the question that I loved to ask most : “Who/Which institution set the BLR?”. The most common answer that you will get is? – “Bank Negara Malaysia (BNM)”. And this is one of the most common misunderstood fact even among mortgage salespersons. In reality, since 2004, BNM removed the control of ceiling rate for BLR set by bank and also the ceiling for interest spread. This enabled bank to determine the BLR and their offered package to their client based on their finance and operating cost. (refer to: http://www.bnm.gov.my/files/publication/ar/en/2004/cp05_002_whitebox.pdf)

This led to a situation that most if not all major banks set the same BLR which doesn’t really reflect their finance cost and then compete among each other by giving “BLR Minus” package. Next question –

If Base Lending Rate (BLR) is the base, how can bank offer a “BLR Minus” package which is below their base lending rate?

The answer to this question will be the BLR isn’t really their base rate.

Eventually, this provided a perception to the public that they are getting a loan at a discounted rate. Imagine this, there are housing loans out there offered with BLR -1.7 package which brought the effective rate to 5.15% (Current BLR: 6.85%). Client would generally perceives that they are still getting discounted rate but only the discount is not as great as those getting larger loan who are offered with BLR – 2.45 (effective 4.4%). But with the introduction of BR which, let us assumed at 4%, about 0.75% above Overnight Policy Rate (OPR) and is now offered with a package of BR + 1.15 (effective 5.15%) compared to a client offered with BR + 0.4 (effective 4.4%), client will definitely started to question why his/her loan was loaded with 0.7% higher than another client.

We believe that the purpose of BNM to restructure the Lending Interest Rate system is to rectify this situation and require banks to set a BR which reflect their fund cost and operation cost. Therefore, introduction of BR should be very much welcomed and there’s no need for worries.

While with BR, the package will be “BR Plus”, the BR will not be equivalent to BLR which is 6.85% at this moment (Dec 2014). We strongly believe that the after the introduction of BR, the effective rate will still be almost the same as current BLR system.

*This article is solely based on our own opinion and for general reading purpose only.

Feel free to contact us at ask@ethanteh.com for more details or any mortgage loan enquiries.