It is no secret that millennials are a generation who borrow substantial sums of money to fund their lifestyles. Unfortunately, many are also taking this opportunity to become instant property millionaires.
Loan compression, or a “secret” multiple loan submission strategy advocated by so-called “property investment gurus” in the market, is one of the reasons why some millennials have ended-up facing financial stress.
Many millennials are advised to invest in multiple real estate properties in one go, usually associated with “cashback/rebate” properties. Generally, these are homes sold in bulk to a group of investors.
Some developers are 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 six figures per unit. This is only possible as these cashback properties usually have a marked-up selling price.
However, in real estate you have to be a millionaire first and only then invest in properties to become a multi-millionaire, REI Group CEO Dr Daniele Gambero told Property Advisor.
“Being greedy doesn’t help and the chances of ending up bankrupt are extremely high. These millennials have also exceeded their financial capability,” he said, relating the plight of his close acquaintance.
“A friend of mine has been declared bankrupt by the banks. His luxury car has been repossessed, all his credit cards have been cut into half, the house where he was living, a gift from his parents, has been caveated and he doesn’t have enough money even to eat.
“Banks are after him as even after auctioning the three properties, he still owes them more than RM700,000.”
Prof Dr Ismail Omar, President of Land Professional Association of Malaysia (PERTAMA) opined that cashbacks and rebates might distort the property market when the property is overpriced and higher than the open market value.
“In the end, cash and rebates may bring about less maturity and a less genuine property market that is highly speculative and with high risk levels.”
Ismail said the ultimate intention for cashbacks is for buyers to enjoy some monetary assistance to carry out renovations or to cover some maintenance fees, property taxes such as quit rent, pay related outgoings and recover a little deposit paid to the seller, etc.
Besides the benefits of giving cashbacks and rebates to buyers to enjoy a little extra money, there are some shortcomings.
For millennials struggling financially, the following tips can help put you on the right track towards a successful financial future.
Credit reporting agency, CTOS Data Systems Sdn Bhd CEO Eric Chin urged millennials who have fallen or who might fall into the loan compression trap to open up and talk about what’s going on with the people they trust.
“It can help you and the people around you to understand what is happening and work out how to deal with it together.
“Afterwards, make a clear, realistic budget to get through the situation and work with your close ones to help you set and achieve those goals.”
He suggested setting spending limits and rules, such as only purchasing essentials for the moment.
“We need to identify the problem, then figure out available solutions to resolve it. For instance, if you are having trouble making your monthly repayments, speak to your bank to find out if some payments can be deferred and for how long, or if restructuring is possible,” he said.
Other than that, Chin said it is essential to take care of your health, both mentally and physically.
“You need to be in top shape to think clearly, to be proactive and face your challenges. Your health is also important to take care of yourself and your loved ones.
“Check your credit file regularly to make sure you are going in the right direction. If you’re going into debt, seek professional advice or financial counselling on how to manage your debts. You can contact an organisation such as AKPK, which offers free financial and debt management counselling.”
Credit Counselling and Debt Management Agency (AKPK) financial education department head Nor Akmar Yaakub suggested millennials be proactive and not let the banks take control of the situation.
“It is highly advised that consumers get the right financial education on property investment. You need to manage your expenses wisely, reduce or stop discretionary expenses – and delay gratification.”
She opined that if millennials have a negative cash flow, liquidate if possible.
“In that case, you need to find new/passive income to supplement the repayments. Always remember to think many times before venturing into loan compression and seek professional advice before making any financial decisions (check your affordability).
“You can become the Robert Kiyosaki of Malaysia, but you need to stay true to your investment goals and long-term returns. There is no shortcut for it.”
Nur Akmar added that the millennials needed to be wary of financial scams as they are the most vulnerable group.
“If you have trouble managing your debts, you need to reschedule the loan with financial instructions. Feel free to consult AKPK for restructuring before bankruptcy proceedings.”
Do your credit checking
CTOS’ Chin said it is necessary to do the credit check, especially when it involves a serious situation like loan compression.
“A credit check is key to confirm the risk of the consumer when it comes to increased borrowings, as their score will demonstrate their high utilisation of their credit limit in the banking market if they have taken part in loan compression.
“This then allows the banks to make informed decisions about whether the potential customer is already overleveraged or not,” he said.
Meanwhile, Nur Akmar said a credit score was pertinent to millennials in order for them to obtain future financing and that getting their names blacklisted was not a good start.
She added that more education on credit scoring to better understand the importance and value of it.
