Simple Guide to First-Time Home Buyers in Malaysia
- Are you now renting and believing that home ownership is out of reach?
- Are you looking for ways to build capital to buy your first home?
- Legal fees (Sale & Purchase Agreement and Loan Facility Agreement).
- Stamp duties (Sale & Purchase Agreement and Loan Facility Agreement).
- Property Valuation Report.
- Renovation and Furnishing.
- Reserve funds (at least 12 months of our mortgage installments).
- Low DSR.
- Good Debt Repayment Behaviour.
- Good Credit Score (CTOS, CCRIS, Experian).
- Akaun Sejahtera
- Akaun Fleksibel
If the answers to the above are “Yes”, read on.
Since my first home purchase more than 20 years ago, I have continued to build on my property portfolio.
Today, I’m a tenant of where I live and a landlord to my tenants. I own properties that have built my net worth substantially and properties that are draining wealth.
Collectively, there are many lessons and insights to be shared. Now, what if I’m in my 20s or 30s and would begin my real estate journey all over again?
What would I do? Here, I’ll list down four pointers that I would take note of and one killer trick to build capital faster. This would enable us to afford purchasing our first home.
1. Our Needs Will Change Over Time
When you're single, choosing a home revolves around your individual needs. Let's say you work in KL. You'd want to live close to your workplace and wouldn't need a large space.
So, you might consider a 600-700 sq. ft. condominium in PJ or KL, as it fits your current lifestyle. Fast forward a bit, and you've found love and gotten married.
Now, you have to ask yourself: “Is this condominium suitable for raising a family?” Would you need a bigger home? This brings up another question: “What will you do with your condominium in PJ or KL?”
Take my experience, for instance.
I bought a house in Penang in my 20s. Over the years, due to career and family reasons, I relocated to KL, then to the US, and now, Taipei. I've never stayed in one place for more than 10 years.
With our increasingly globalized world, it's becoming less common for someone to buy a home and stay in it for 10, 20, or 30 years. Our housing needs evolve as we progress in life.
So, what would I do?
Would I stop buying homes altogether?
Not exactly. I still buy property but with a keen awareness of my changing needs.
I believe it's wise to invest in properties that can be easily rented out or sold in the future. This flexibility is crucial for times when relocation is necessary.
In other words, even if I’m eyeing a small and stylish condominium as a single person, I’d consider how easy or difficult it would be to rent out or sell the unit to future tenants or buyers.
2. The 25% Rule
As Malaysians, we’re eligible to obtain a mortgage of up to 90% of the home price for the first two housing loans. For instance, if a residential property is priced at RM 600k, we could obtain a home mortgage of RM 540k and our down payment for it would be RM 60k.
But that is not the only capital we need to prepare for. Besides the RM 60k in downpayment, it is wise for us to prepare the following:
All in all, the ballpark figure you need to prepare to afford a RM 600k home is about RM 150k, which is 25% of the home price. That’s why it is called the 25% Rule.
3. But What About Rebates & Discounts?
Yes, it’s common for property developers to offer rebates and discounts to home buyers. They’re intended to make homeownership more affordable.
As such, wouldn’t it be much better for us to purchase our homes from developers, especially when we are short in cash?
The answer is yes and no.
For instance, let’s say there are two properties for sale in KL. Each is priced at RM 600k. Here, the first property is an existing 1,200 sq. ft., 3-bedroom, 2-bathroom unit in a mature neighborhood.
The second property is a 600 sq. ft. studio unit, situated 500 meters away from the first property, which would be fully constructed in two years' time.
The first property requires a downpayment of RM 60k and transaction costs. The second property requires less capital as its developer offers discounts and rebates to buyers.
Does it mean that the second property is a better deal?
Not quite. Here, we find that the first property is valued at RM 500 per square foot. Whereas, the second property is valued at RM 1,000 per square foot.
So, the first property is cheaper than the second property in terms of valuation. Hence, don’t get confused with valuation and affordability. What is cheap may not be affordable. Also, what is affordable may not be cheap.
Hence, the tip is to shop around for 10-20 properties in your preferred location.
This includes the properties that are still in construction as well as completed units. You may value property prices based on their prices per square foot.
After 10-20 properties, you would get a better insight as to which of these property deals offer the best in terms of valuation.
4. Debt Service Ratio (DSR)
Here is the story of two colleagues: Jason and Danny.
Jason earns RM 8k a month. Danny earns RM 12k a month. Despite earning less, Jason could afford to buy a nice decent home in KL, but not Danny.
Why? The answer lies in DSR (Debt Service Ratio).
So, what if I tell you that Jason pays a total of RM 400 per month in total debt installment, which consists of his car loan? He has no other loan. Thus for Jason, he pays RM 5 in debt instalment for every RM 100 he makes. This works out to be a DSR of 5%.
From the viewpoint of bankers, Jason is eligible to obtain a substantial mortgage to buy a home. As for Danny, what if I tell you that he owes multiple car loans, credit card debts, personal loans, and so on and so forth?
His total debt installment is RM 6k a month or DSR of 50%. Plus, what if Danny is always late in servicing his debts?
To bankers, although Danny earns more income, he has more debt commitments and poor debt repayment behaviors. Hence, he would be rejected for more mortgages by bankers.
So, it’s not just about income. What’s needed to obtain a mortgage to buy a home are:
5. ASB & EPF
Here’s the killer trick to build my capital faster if I’m a Bumi - ASB Loan. Let’s assume that I’m an average income earner, making RM 4-5k per month. I don’t have much savings, but my DSR is low.
What I’ll do is to obtain RM 200k in ASB Loan to invest in ASB that’s worth RM 200k. Based on ASB’s track record, its dividend yield is 5% per annum.
So, what I’ll do is to compound my investment return by reinvesting its dividends back into ASB. In 5 years, I’ll be able to amass RM 255k in ASB.
As for ASB Loan, let’s take Maybank’s offering as an example. The maximum loan tenure would be 35 years and its interest cost is 4.4% per annum.
So, my monthly loan commitment would be RM 935 a month. After 5 years of debt repayment, I would reduce my ASB loan to RM 187k.
So, if we subtract RM 255k in ASB with RM 187k in ASB loan, the netted amount would be RM 68k.
Besides, we would accumulate some savings in our EPF accounts, namely:
Hence, by combining RM 68k in ASB with Akaun Sejahtera, Akaun Fleksibel, and cash savings, I can foresee that I would have >RM 100k in cash reserves to afford a downpayment for a home within 5 years, even if I’m starting with little or no cash savings.
Conclusion:
I believe if you would take note of the above and make deliberate preparations, you could afford to purchase a decent home in KL even if you are starting off as an average income earner.
But, I would say that the key is to look beyond current financial circumstances and to start preparing and working towards it. For more details on how you can use ASB loan to your advantage, refer the following link: ASB Loan
