PR1MA: Should You Use Your EPF Savings As Collateral?

To meet the challenge of soaring house prices, the Malaysian government launched PR1MA, an affordable housing scheme to assist middle-income households to purchase their first home.

Since 2011, PR1MA has approved about 260,000 units nationwide, and out of that, an estimated 132,000 are being built. Usually, these units cost between RM100,000 and RM400,000 and they consist of apartments or terrace houses.

However, the government’s initiative ran into a snag when it was discovered that many who qualified for the PR1MA aid did not make the grade when it came to obtaining loans – despite a facility to make it easier for buyers to obtain financing of up to 110%.

According to the Real Estate and Housing Developers Association (Rehda), property prices ranging from RM250,001 to RM500,000 and RM700,000 to RM1 million faced the highest loan rejections at 24% and 27% respectively.

The association cited end-financing issues and loan rejection as the top reasons for unsold properties in the country, adding that end-financing problems have plagued the property market since 2014.

Time to step up

So, to solve the problem of loan rejections, Prime Minister Datuk Seri Najib Razak and his administration mooted a “stepped up” end-financing (SPEF) scheme during the tabling of Budget 2017.

This allows selected first-time homebuyers to not only secure a loan, but also qualify for a higher amount as well. This facility has been effective since January 1 this year.

Is this necessary, you ask? To put this in perspective, at least 15,000 Malaysians were unable to secure bank loans after successfully applying for PR1MA houses.

That means, up until last year, 60% of successful home applicants had to forgo their PR1MA offer.

Breaking it down

In a nutshell, the scheme offers a “stepped-up” financing for the first five years and a second option to withdraw from the Employees Provident Fund (EPF) Account Two.

Under both options, a homebuyer pays only the monthly interest for the first five years and the principal amount is added on from the sixth year until the loan is paid off.

Below is an example of what this scheme looks like:

PR1MA		SPEF
		Scenario 1	Scenario 2
Monthly income	Conventional loan	Stepped-up financing	Stepped-up financing + EPF account
RM2,500	RM95,000 RM448/month	RM116,700 Year 1-5 = RM448/month Year 6 onwards = RM666/month	RM162,200 Year 1-5 = RM626/month, Year 6 onwards = RM925/month
RM3,000	RM187,000 RM880/month	RM228,600 Year 1-5 = RM880/month Year 6 onwards = RM1,305/month	RM283,200 Year 1-5 = RM1,096/month Year 6 onwards = RM1,615/month
RM4,000	RM347,000 RM1,618/month	RM408,700 Year 1-5 = RM1,618/month Year 6 onwards = RM2,331/month	Max RM440,000 Year 1-5 = RM1,906/month Year 6 onwards = RM2,509/month
		• Pay interest for first 5 years
		• Pay principal + interest from year 6 onwards

Source: The Star

So, let’s say Ahmad, 35, has been selected for a PR1MA unit worth RM420,000. He has been working and contributing to EPF since 22 and is not straddled with any loans or debt.

He is earning about RM4,000 a month and decides to opt for the SPEF + EPF option which allows him to borrow up to RM440,000.

With a loan tenure of 30 years, here’s how much interest he is expected to pay:

Loan amount	RM420,000
Annual interest rate	4.58%
Tenure	30 years
Estimated monthly repayment (Year 1 – 5)	RM1,537.00
Total interest (Year 1 – 5)	RM92,220
Estimated monthly repayment (Year 6 onwards)	RM2,353.61
Total interest (Year 6 onwards)	RM286,082.63
Total interest over 30 years	RM378,302.63

What’s the catch?

The catch for the SPEF + EPF is, EPF members would not be able to access their Account 2 for any withdrawals over the period of the loan.

Some of the noted withdrawals that will no longer be available are:

• Age 50 Years Withdrawal
• Education Withdrawal
• Health Withdrawal
• Hajj Withdrawal

Furthermore, Muslims who use this scheme risk giving up their right to use their Account 2 to fund their Hajj trip. And in general, members can’t use the Account 2 for medical emergencies or to fund a child’s tertiary education.

Five to 10 years down the road, you may be facing a medical emergency and you will not be able to withdraw from your EPF savings to pay for your medical fees.

This means, once applicants sign up for the SPEF, their Account 2 will be frozen from withdrawals until they settle their financing loans.

Also, as a PR1MA homebuyer, you are subject to a moratorium period of 10 years for outright purchases, meaning if you are successfully balloted for a home, you are not allowed to sell, dispose or rent your home until the expiry of the moratorium period.

If any emergency arises, you will not be able to sell your house to liquidate your investment in the first 10 years.

There may be a better way

At age 30, Ahmad would have saved up about RM19,800 in his EPF Account 2, assuming a starting pay of RM2,750 and an average annual increment of 5%.

EPF savings at age 30
Acc 1: RM46,100	Acc 2: RM19,800

Instead of getting a 100% stepped up financing, Ahmad can consider making a withdrawal from his EPF Account 2.

Property price	RM420,000
Down payment from EPF withdrawal	RM19,800
Loan amount	RM400,200 (maximum without EPF is RM408,700)
Annual interest rate	4.58%
Tenure	30 years
Estimated monthly repayment (Year 1 – 5)	RM1,465.00
Total interest (Year 1 – 5)	RM87,900.00
Estimated monthly repayment (Year 6 onwards)	RM2,242.65
Total interest (Year 6 onwards)	RM272,595.88
Total interest over 30 years	RM360,495.88

In this scenario where Ahmad withdraws from his EPF savings instead of taking up the SPEF + EPF scheme, he would not only retain his flexibility in accessing his EPF savings in the years to come, he is also saving money on interest charges.

In this second scenario, he is paying only about RM360,495.88 (assuming that the interest rate remains fixed throughout the 30-year tenure), while the SPEF + EPF scheme would have incurred a total of RM378,302.63. That’s RM17,806.75 in savings!

However, if the property price is higher and Ahmad’s EPF savings in Account 2 is insufficient to top-up the difference, he would have no choice but to take up the SPEF + EPF scheme.

According to EPF, as applicants’ incomes improve over time, they could refinance the loan to release the “ring-fence” – another term for the freezing of their Account 2 – so they could use their second account for other purposes.

It’s a huge consideration

Using one’s retirement fund for anything other than retirement should be considered carefully. It should be the last resort.

By using your retirement fund for anything other your retirement, you run the risk of depleting your retirement fund in your sunset years, or even before your retirement comes around.

According to EPF, many are not ready to retire. Citing the rising cost of living, longer life expectancy and a higher inflation rate, the pension fund has revised the quantum for basic savings from RM196,800 to RM228,000.

This is the minimum target when members turn 55 years old and benchmarked against the minimum pension for public sector staff.

As for Ahmad, even after he has withdrawn from his Account 2 to pay for his home purchase, he could still save up the following amount by the time he retires at 60 years old:

EPF Savings Summary
Expected total savings: RM4,655,400	Acc 1: RM3,870,100
	Acc 2: RM785,300

This is possible if he continues to earn an income with a 5% increment every year, combined with prudent management of finances.

While you are using your Account 2 to pay off parts of your home loan, you can also use the surplus cash from your salary to invest in unit trusts that outperform EPF dividends, invest in stocks and shares, or even pay towards the principle of your housing loan, thus shortening the loan tenure while saving on interest charges. You might also want to consider taking up a part-time job to boost your finances.

Despite all these options, remember to always weigh your options carefully. We are talking about literally cutting one of your financial lifelines.