Due to the recent hike of property prices, owning a home has become more challenging. I am glad that I bought my first house as soon as I was financially able to. This however was not the case for the first tenants who stayed at the very first house I bought in Penang. When I moved to a bigger house, I tried to sell off the old home and this couple made me an offer. However, due to unknown reasons, they settled instead with a tenancy.
Recently, I managed to sell off the same property while that same couple are still renting. Thanks to their decision to rent from me back then rather than buying the property outright, I managed to sell the property at a price of 34% higher than it went for back then.
What about you? If you are not yet a homeowner, you’ll find that buying your first home may be one of the most exciting events in your adult life.
Here are five financial pre-requisites that are musts before you sign on the Sales and Purchase Agreement (SPA).
1) HAVE ADEQUATE DOWN PAYMENT
Whether you are buying directly from a developer or from a seller at the sub-sale market, you must have a down payment of 5-15% of the total price.
The first step to buying after you’ve identified your desired house is to sign the booking form and to pay 1-2% earnest deposit, or the booking fees. This will allow 14 days for you to arrange for the SPA signing. Upon signing the SPA, you will be required to pay the remaining down payment that adds up to the total of 10%.
After that, you’ll need to finance the rest of the purchase price with a bank loan, assuming that you do not have the cash in hand to pay in full. In some cases, depending on the type of property and your credibility, you may get lower or higher financing margins compared to the industry standard of 90% financing. If the banks only lend you 85% of the purchase price, you will need to fork out another 5% to make up the difference.
Of course, there are cases with literally no down payment money needed but you will still be required to fork out the initial payment and get it back after a short period through smart negotiations, special discounts or rebates from the developer or creative financing. Nevertheless, the first financial must is to have 5-15% of the down payment accumulated.
2) ESTIMATE HOW MUCH YOU CAN BORROW
After you have got your down payment ready, the next thing you want to find out is how much you can afford to fork out for your monthly installments. This will determine how big a loan you are able to take.
Nowadays, banks are getting more stringent. Your loan servicing affordability is assessed by calculat- ing your personal Debt Service Ratio (DSR). The DSR is equal to your total monthly debt repayment obligation, divided by your monthly take-home income (after tax and EPF contribu- tion). Bank Negara requires the bank not to lend the borrower more than 60% DSR.
In other words, if your take home pay is RM5000/month, you will be able to serve a loan payment of RM3000. However, it is really not recom- mended to go for the limit. I would recommend that you keep your DSR under 30%. And this 30% should also include your car loan.
Depending on the loan tenure, the younger you are, the longer term you can take, probably up to 30-40 years to completely pay up the mortgage. At the current interest rate of about 4.3%, and 30 years loan tenure, a monthly payment of RM1000 can serve a loan amount up to RM200,000.
After knowing how much you can borrow, the next financial must-have is to understand how much you can really afford to pay every month.
3) UNDERSTAND HOW MUCH YOU CAN AFFORD
When you have your own home,there are other related expenses that come with it other than the monthly mortgage installment. First are the maintenance fees if your property is in a gated and guarded community, or a high rise building. Secondly, you will need to pay yearly fire insurance premiums, quit rent and assessment. Thirdly, there are also regular expenses such as Indah Water Konsortium, water and electricity bills, not to mention the initial deposit for all these utilities.
Therefore, you’ll need to understand that your expenses will increase when you are staying in your own house, compared to staying with your parents or renting a place. So how much exactly can you afford? A thorough calculation is recom- mended.
4) TRANSACTION COST
When making a home purchase, there are also other one time fees that can’t be neglected. You may need to pay your real estate broker’s commission when they have helped you hunt for your home. There are also legal fees involved to prepare the SPA and the loan agreement.
Besides that, the biggest amount of all is the stamp duty payable to the government.
SPA Stamp Duty Rates:
First RM 100,000.00 = 1% Next RM 100,000.01 – RM 500,000.00 = 2%
Next RM 500,000.01 – RM 2,0100,000.00 = 3%
Above RM 2,000,000.00 = 4% Meanwhile, the loan agreement stamp duty rate is 0.5% for any amount.
Take note that these transaction expenses can add up to a total of about 5% of the purchase price, easily.
5) BE READY WITH RENOVATION AND FURNISHING COSTS
After the house keys are handed to you and you are a proud new homeowner, you may want to do more alterations and enhancements to your home and this will incur some renovation and furnishing costs.
You can always decide the enhance- ments that suit your budget. No matter how frugal you are, there will be some basic furnishing required before you can stay comfortably in your new home. So get ready with a minimum fund to cover this inevitable expense.
Buying your own home is probably one of the biggest and most impor- tant financial decisions in your life. Some people deplete all their accumulated savings after the purchase. Some even incur more consumer debts when they swipe credit cards and opt for installment payback to furnish their home.
However, at the end of the day, the satisfaction and fulfillment you get when you are able to stay in a property that has your name in the ownership title may well make it all worth it.
Happy house hunting!
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