What’s Your Housing Affordability?

Are you ready to take a dip in the property pool as a first-time home buyer? With the recent favourable hike of the real property gains tax (RPGT) in the Budget 2014, perhaps your dream home will soon become a reality.

Now that you are ready, do you know what kind of property and at what price point should you consider purchasing? To determine your housing affordability isn’t always easy. Can you afford the brand new condominium near the city? Or can you only afford an apartment in the suburb?

How much cash do you need to have to purchase a RM300,000 property? Will you be able to afford the down payment or the monthly repayment with your current income?

Before you start scouring the property listings, take a cold hard look at your finances and decide how much you can realistically pay.

What’s the maximum loan you can get?

To determine an affordable price point for your first property, there are a few things you need to consider. Some of these considerations include, your monthly income, cash amount you have available, and how much you can borrow.

Your loan amount depends on a number of things, including the market value or purchase price of your house, the type of property (e.g. residential or commercial), the location of the property, and your profile (i.e. age and income level).

To gauge the maximum property loan amount that the banks will most likely approve, it is always best to ensure that the total monthly instalments on all your outstanding loans, and your prospective property loan do not exceed 70% of your net income. Net income refers to your income after deductibles, such as income tax and EPF.

Based on the example profile below, the purchaser is eligible for the maximum loan tenure at 35 years. For borrowers above 30 years of age, the maximum tenure is tied to a borrower’s age. Most banks stipulate that borrowers repay their home loans in full before they are 65 or 70 years old.

Here’s the breakdown:

From the calculation above, the monthly instalment and other debt commitments do not amount to more than 70% of monthly net income. Hence, with a net monthly salary of RM3,500, you are most likely able to get a loan approval for a RM400,000 property.

To make it easier, use online home loan calculator to calculate the monthly instalment of a property. Based on the monthly instalment, you will know your home loan eligibility on your current net salary.

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What about upfront payments?

It’s not all about monthly instalments – the largest upfront cost in a home purchase is the 10% down payment on the property. But that’s not all.

First-time home buyers may not know it; but buying and financing a home takes more than just the down payment and the loan. There are various miscellaneous fees and charges involved. Below is estimation* of the fees and charges that may be incurred:

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
• 3% on the subsequent amount

2) Sale & Purchase Agreement (SPA) legal fees

• 1% for first RM150,000
• 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
• 0.7% of remaining value of loan within RM1 million

6) Stamp duty for loan – 0.5% of loan amount
7) Legal disbursement fee for Loan Facility Agreement – A few hundred Ringgit
8) Fee for transfer of ownership title – A few hundred Ringgit
9) Mortgage Reducing Term Insurance – Think of it as a life insurance for your home loan. It can come up to RM1,000 or more, but this may be optional with some banks.
10) Government Tax on Agreements –  6% of total lawyer fees
11) Bank processing fee for loan – RM200

*Note: The fees and charges are just an estimation 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 may set you back by about RM20,000 in fees and charges – which will have to be borne by you, the buyer.

It is advisable to always have extra cash on top of the money allocated for the 10% down payment before making any property purchases.

Yes, I’m ready!

The above shows the minimum net income you need to earn in other to get a property financing approval of a certain amount. However, to ensure financial stability, you should really look at your finances and decide if you can comfortably service your mortgage monthly.

Once you have dotted the i’s and crossed the t’s, and most importantly, found your dream home,  it is time to shop for a property loan that offers the most competitive rate. Most people just jump on the first loan offer and do not spend time to compare and research.

With iMoney’s home loan calculator, you can easily compare the rates and apply online with no additional cost. With free consultation, first-time property buyers can rest assured that they are making the right financing decision for their new home.