Residential Property Purchase Incentives

• 1 February 2017
• Property Focus
• 2004 Views

Developers in Phnom Penh have been providing purchase incentives as some buyers struggle to arrange a loan or mortgage when investing in a property.

In some cases, property developers offer to loan buyers enough for a deposit when they buy a new home. These developers provide incentives in the form of loans and mortgages, typically with more competitive rates, to their own clients, despite bank loans continuing to play a key role in helpingCambodians purchase their homes.

Depost-free or interest-free payments work by allowing buyers to secure a unit with no down payment. Under these mortgage schemes, buyers may be required to pay a reservation fee to secure their home. Instead of paying a deposit, buyers will make interest-free monthly payments that will eventually total up to a certain percentage of the value of their selected house unit. The payment period will be incurred from the start of construction to the handover. Traditionally, buyers have to pay deposits in three different phases – usually when they sign the contract, and within a certain period after they sign the contract, when the construction begins, and the total deposited sum is payable upon occupancy.

In Phnom Penh, developers such as Borey Peng Huoth and Orkide both provided long-term mortgage plans without any deposit. Most buyers would prefer to purchase in a development where developers offer “in-house” financing spread over the construction of the building. This opens up borrowing possibilities for property investment but also increases the personal financial risk for customers. Their houses will be confiscated if they cannot afford the long-term payment scheme. At the same time, it creates risk for developer unless they have enough capital to construct their houses.

“It is good to the buyer only if they have a permanent income stream, otherwise it will create problems for developer in the future,” Sokhun Chev from KAT Appraisal Co., Ltd said. Chan Mlop Sokha from Sokha Law Firm indicates the positive impacts of developers provide purchase incentive to their buyers. “This will encourage property sales, and provide opportunities for first time home buyers / low income earners to become property owners. In the end, the positive aspects outweigh the negative.”

Home buyers must be highly disciplined when it comes to the outstanding debt and make sure they can afford and cover the loan payments. In terms of risks in mortgage, for example, the housing developer may lend you 50 percent of the property value and ask to be repaid in 20 years. You must be able to afford your mortgage repayments and to pay off the property developer’s loan. You could end up in negative equity if you take out the mortgage and the property value falls. This would mean you owe to your lender – in this case it is the developer. Furthermore, interest rates are extremely high in Cambodia and interest paid on loans can add up to a large sum of money.

One must realise that the interest will add up. Although payments are spread out over a long period of time, say 15 or 20 years, and the interest rate may seem low, when you add up the interests over the years, the total amount repaid may be almost double or more the loan amount, depending on the length of the loan, the interest rate and the amount borrowed.

It is true that most upper-class income people in Cambodia can afford to purchase a house outright with cash. But the less wealthy may struggle to meet the long-term payment schemes. As mentioned previously, if you have trouble paying off the loan, you risk losing your property. As a home buyer, it is important to understand the pros and cons of all available loan options before you make your purchase decision.

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