A new circular permitting under-construction housing to be used as collateral for bank loans should assist many homebuyers in accessing credit.
Like many other young couples who have come from the provinces to live in Hanoi, 12 years on Mr Nguyen Van Hung and his wife still live in a cramped rental house. They’ve been unable to complete the payments on their under-construction apartment, which they spent all their savings plus a bank loan on buying in 2011. One of the barriers to them borrowing more is collateral, as they are yet to receive an ownership certificate, known as a “pink book”, for the apartment. “Sadly, we will have to find someone to buy the apartment,” Mr Hung said. “The monthly bank interest rates have become a major burden for us.” But there may, however, be some hope for the young couple, as a recent circular allows the owners of under-construction commercial and social housing to borrow from banks by using this housing as collateral.
According to inter-ministry Joint Circular No 01 from the State Bank of Vietnam, the Ministry of Justice, the Ministry of Natural Resources and Environment, and the Ministry of Construction, which took effect on June 16, under-construction commercial and social housing (apartments, villas and townhouses) can be used as collateral when seeking bank loans. The joint circular also specifies that borrowers are only permitted to use their under-construction housing as collateral at a single credit institution, with the value of the housing to be agreed upon by both parties based on its value on the date the sale contract was signed.
Any under-construction housing must meet certain conditions, including having approved technical designs, completed foundations, and signed contracts. Houses that have been handed over to purchasers without property right certificates from relevant authorities and not sealed off for legal proceedings or administrative penalty decisions can also be used as collateral, as can houses that belong to projects granted certificates or land handover decisions.
Analysts said that the circular will create some positive movement in the country’s stagnated real estate market. Previously, those who wish to access loans to purchase housing were required to put up other items as collateral, such as separate houses or land, which was beyond the capacity of many borrowers. “This is a significant decision,” said Mr Nguyen Van Duc, Deputy Director of the Dat Lanh Real Estate Company. “It will help people, particularly low-income earners, to access loans to buy or complete their first home.”
Many other countries already allow under-construction housing to be used as collateral, with policies in place to limit any risks on loans, according to Mr Dang Hung Vo, former Deputy Minister of Natural Resources and Environment. With the joint circular, this type of collateral presents no risk and contributes to boosting the purchasing of property. “It also means that real estate enterprises can more easily sell their products and retrieve capital to complete the project,” he said.
A representative from the Phuong Dong Joint Stock Commercial Bank believes that the circular will create more confidence among banks in lending to homebuyers and promotes the availability of credit. Both commercial banks and homebuyers, however, may be more vulnerable. “It is necessary for credit institutions to carefully review the investment and business plans of housing developers and assess their competence,” he said. “Banks can then disburse capital in line with construction progress.”
It appears that the new circular places greater responsibility on homebuyers. Slow or delayed projects create losses for borrowers, and when problems occur in construction quality the market price will decline compared with collateral stated in the home loan. Home buyers are then obliged to offer equivalent collateral or the bank can request a foreclosure. “The circular does not regulate any specific responsibilities on the developer for completing the project,” said Ms Nguyen Thi Van Khanh, Head of Valuation at Savills Ho Chi Minh City. “This definitely presents more risk to borrowers.” Homebuyers will be more confident in borrowing if there are guarantees on project construction or certain legal constraints on the developer. As it stands, there is reliance on the reputation of the developer to finish construction.
Mr Le Trong Dung, Head of the Legal Department at Vietcombank, also identified risks banks may face in accepting this type of collateral at a recent seminar on the issue in Ho Chi Minh City. In some cases, developers may use their projects and land use rights as collateral at one bank and homebuyers use their under-construction housing as collateral at another credit institution. How can the interests of the two banks be resolved if the housing developer goes bankrupt? Vietcombank has suggested that the range of homebuyers subject to the circular be expanded, as it only relates to housing projects. “There are also many cases where individuals may wish to take out loans for under-construction housing on their own land,” he said.
Regarding concerns that the new circulate may trigger additional bad debts at banks, Ms Van from Savills said that lending is the main activity of commercial banks and they must have their own risk control systems to minimise any bad debts. Banks have long been involved in providing home loans and so surely have the necessary risk controls already. “I think the most important matter is the true value of the collateral,” she added. If the collateral is valued accurately by an independent professional valuation entity, the risk of bad debts will be significantly reduced. The circular does not increase the risk to commercial banks for two reasons. First, banks hold the collateral throughout the term of the loan. Second, banks only disburse loans according to construction progress and only directly disburse to the project contractor. This means that loan disbursement is based on construction progress, which minimises any disbursement exceeding the value of the collateral and prevents investors or borrowers from using the loans for any other purpose.