Most of us dream of owning our own home growing up, even before we had a stable job. One can dream, but reality hits once we become adults and we realise how much funds one needs before buying their own property. If you’re seriously considering getting your own home or even if it’s a pipe dream for now, you should be prepared for the challenges a homeowner will face and consider your financial standing.
To dive into the details and the stark reality of purchasing your own abode, we spoke to Paul Chen, a Real Estate Negotiator. The 30-year-old frequently shares about getting started in property investing using his personal stories and those of other successful investors within his network on his website.
RD: How do you know if you are financially ready to buy a home?
PC: Identifying when you are ready to buy a home is essential. Some of the key metrics I used when advising younger clients is to understand how much they are earning on a monthly basis and how much of their take-home pay are they saving.
For starters, if you are looking to buy a home with the support of your parents, a sibling or a spouse, it is better to only start considering homeownership when you and your partner each have a monthly income of RM4,000 while saving up at least RM1,300.
Property prices in prime Petaling Jaya areas today are at least RM500,000 for a 2-bedroom serviced apartment while those in a location nearer to heavy industrial areas are at least RM400,000.
Taking a housing loan that is 90% of a property price of RM450,000 for a 35-year tenure will require you to pay an RM1,979 monthly instalment. That is before we consider other homeownership expenses such as:
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Maintenance fees
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Sinking fund - All residents in a strata property contribute to this fund, providing the financials in the event of major works such as repairing a common swimming pool
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Fire insurance
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Quit rent - Also known as cukai tanah, this is essentially land tax charged by the government for locals who own land or property) and Tax Assessments that are paid to the local council twice a year.
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Tax assessment - This is based on the assessed value of your property, any exemptions for which you qualify, and a property tax rate
If you intend to finance the property without any support from your family, you will need to have savings of at least RM2,500 every month. With a savings level of 50%, you will need to be making RM5,000 every month in income. This is on the assumption that you do not have other financial commitments such as motor loans, credit card debt, and student debt.
Looking from a bank's perspective, this is typically how banks evaluate if a person is eligible for a housing loan. They will look at the individual’s Debt-To-Service Ratio (DSR).
The common threshold set by banks for your DSR is 60% of your total monthly income. Here’s how it works:
60% = (housing loan monthly payment + motor loan monthly payment + credit card debt monthly payment + student loan monthly payment) / Total monthly income x 100%
Let me give an example of an individual’s financial commitments:
Total monthly income = RM6,000
Motor loan debt = RM1,200 (monthly)
Credit card debt = RM300 (monthly)
Student loan debt = RM200 (monthly)
Possible housing loan = RM1,979 (monthly)
My new DSR with the housing loan would be:
(RM1,979 + RM1,200 + RM300 + RM200) / RM6,000 x 100% = 61.3%
This is just above the 60% threshold set by most banks and you may be able to qualify for a housing loan.
But one thing to always remember is that eligibility is not the same as affordability. While you may be eligible for the housing loan, the financial strain of the housing loan may do harm to your saving account and other investment opportunities. Remember that it is important to always have enough money saved for rainy days.
RD: Can you break down the exact costs that come with buying a home including those that people don’t usually consider?
PC: Buying a property does come with a number of costs. Let's begin with the cost that everyone knows, the price of the property. In the legal aspect of things, this is the sales & purchase price of the property where you and the seller (and sometimes developer) have agreed to transact the real property at a said price.
For example, the home that you are looking to buy is priced at RM500,000, a 2-bedroom unit somewhere in a prime Petaling Jaya area. However, the cost of buying the home does not end at the sales & purchase price!
Because this is a transaction that needs to be recorded with the government, and you will most probably need financing support from the bank, these are the additional costs that are involved:
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Sales and Purchase Agreement Legal Fees - These are the legal fees involved to engage conveyancing lawyers to assist with your transaction
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Sales and Purchase Agreement Legal Disbursement - Miscellaneous fees involved with the printing of the legal document which will occasionally be charged as a lump sum with the legal fees
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Sales and Purchase Stamp Duty - This is the duty paid to the government when the transaction is completed between buyer and seller, mostly known as a Memorandum of Transfer (MOT) fee (Editor's Note: One of the biggest fees you need to pay in cash. I paid RM15,000 for my property and you can't pay by installment)
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Loan Agreement Legal Fees*
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Loan Agreement Legal Disbursement*
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Loan Agreement Stamp Duty*
*Do note that the loan agreement-related expenses are only applicable if you take up a housing loan to finance the property. Otherwise, cash buyers will not need to fork out loan agreement-related expenses.
After you've completed the transaction, it is time to take over the house keys and there are other expenses involved as well:
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Renovation costs to make the place habitable for your family or your tenants.
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Fire insurance that is paid annually - this may be mandated by your housing loan provider as described in the loan agreement clauses. For stratified properties such as serviced apartments, condominiums, and gated housing compounds, the fire insurance will be covered by the management team and is often charged into your monthly maintenance fees.
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Quit rent
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Maintenance of the property that is not covered by the building management team such as minor plumbing and electrical work
RD: To get started with owning a property, what type of financing options can one look at?
PC: There are a number of financing options young aspiring homeowners can go for:
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Traditional housing loan
This would be in the form of a flexi-loan or term loan. My personal opinion is to always settle for a flexi-loan. Although it may cost more in terms of account maintenance fees, it gives you the flexibility of clearing off more principal whenever you have additional cash from your yearly bonuses. Term loans are fixed in repayment and loan tenure, so it can be quite burdensome if you intend to clear off the loan quickly.
This is a rent-to-own concept introduced by local Malaysian banks to assist the younger generations on their homeownership journey. The idea is that the bank owns the property on your behalf for a period of 3 to 5 years and you as the potential homeowner will come into a rent agreement with the bank. After a period of 3 to 5 years, you will have to make the decision whether you will proceed with the purchase or forfeit the deposits that you've made previously.
These are both government efforts to assist first-time home-buyers with lower income power. There are a number of conditions imposed but it does allow you to borrow up to 110% of the property price which can be a significant help.
It may sound like a lot of math, but you have to consider all aspects carefully before buying your own place!
Visit Paul’s website or follow him on his Facebook or Instagram pages. Paul focuses on property sales and units for rent in the Hartamas and Mont Kiara area and can be contacted at [email protected].
Image credit: Maria Ziegler on Unsplash https://unsplash.com/@schluesseldienstvergleich_eu