Owning a home you can truly call your own represents the ultimate dream for just about anyone. But with escalating real estate prices and the burden of lengthy loan repayment periods that easily go into 30 years or more, buying and financing a home is not just a matter of saying "I like it" and signing on the dotted line. It is something that should be done with a great deal of sense and prudence.
For all aspiring Malaysians who are actively considering buying a home by taking a loan, here are three things to determine if you're financially ready to undertake this life-changing endeavour:
1) Do You Have Enough for the Upfront Costs?
In Malaysia, most banks offer up to 90% of the property's price (margin of financing) for your first two residential properties. If you receive that 90%, you need 10% cash to pay for the rest of the property's price.
Say you're targeting to buy a condo in Cheras for approximately RM400,000, you must have a minimum RM40,000 to pay upfront, be it from your savings or money from your parents or siblings.
2) Do You Have Extra Cash for Miscellaneous Fees and Charges?
First-time home buyers may not know it; but buying and financing a home takes more than just the deposit and the loan, it also involves miscellaneous fees and charges that include, amongst others:
1. Stamp duty for transfer of ownership title (also known as memorandum of transfer or MOT) = 1% for the first RM100,000; 2% on the next RM400,000, and 3% on the subsequent amount.
2. Sale & Purchase Agreement ("SPA") legal fees = 1% for first RM150,000 and 0.7% of remaining value of property within RM1 million
3. Stamping for SPA = Less than a hundred Ringgit
4. SPA legal disbursement fee = A few hundred Ringgit
5. Loan facility agreement legal fees = 1% for first RM150,000 and 0.7% of remaining value of loan within RM1 million
6. Stamp duty for loan = 0.5% of loan amount
7. Loan Facility Agreement legal disbursement fee = A few hundred Ringgit
8. Fee for transfer of ownership title = A few hundred Ringgit
9. Mortgage Reducing Term Insurance (ie. think of it as a life insurance for your home loan) = RM1,000 or more (some banks waive this amount)
10. Government Tax on Agreements = 6% of total lawyer fees
11. Bank processing fee for loan = RM200
*Note: The percentages are based on recommended numbers and industry averages. Actual figures may differ.
To put things into perspective, a home valued at RM400,000 with 90% margin of financing comes close to about RM20,000 in fees and charges - which will have to be borne by you, the buyer. Now consider this: do you have the money to make it happen?
3) Can You Afford to Pay the Monthly Instalment?
Unless you have the financial muscle to buy a property with cash upfront (in which case, this article probably wouldn't apply to you), you'll need to secure a loan from a bank or a financial institution to help pay for your home.
Based on the current market rate of 4.2% to 4.4% p.a. interest for a standard home loan, you will need to pay a minimum of RM1,760 per month over the next 30 years for a 90% loan to finance a RM400,000 home. To quickly calculate the monthly instalments charged by banks of Malaysia for a home loan of any value, you can use online calculators.
As most financial experts recommend that you allocate no more than one-third of your total income to pay off your home loan, this means you or your household should have an income of at least RM5,280 per month to afford the RM400,000 home.
Take note that Malaysian banks generally allow you to hold loans (including commitment for car loan, personal loan etc.) of up to 80% of your income if you have a relatively good credit score, so you can always choose to increase your monthly instalment and shorten your loan term. But make sure you've done the math and understood the financial implications before you commit!
What If I Don't Qualify?
For those of you who can afford the monthly instalment but do not have the necessary savings for down payment and legal fees & charges, hope is not lost.
For a start, you may consider looking around for properties with free SPA and loan facility agreements to save thousands of Ringgit in legal fees. This should be relatively simple as most new property projects commonly absorb the costs of legal agreements for home buyers.
To cut down on the initial payment needed to buy a home, do actively shop around for properties with low initial down payments. Many developers now offer competitive early bird or "easy entry" sales packages which include rebates of between 2% to even 10% of the property price.
Ultimately, buying a home is a serious life decision that shouldn't be taken lightly. Though owning a home in a posh area is always nice, one should always consider one's financial position when it comes to buying property, so you don't end up being overly burdened for the next few decades. Hopefully, this article will serve as a general guide for all Malaysians who are thinking about buying a home now.