Those who have the capacity to finance their house purchase via cash have several factors to consider before jumping the gun. We delve into the things you need to consider, the pros and cons of getting a house with cash versus a mortgage, as well as other home financing options available in Malaysia.
In 2022, Bank Negara Malaysia (BNM) increased the Overnight Policy Rate (OPR) a whopping four times to its current 2.75%. This was after 2 years of the OPR staying at a record low rate of 1.75% during the pandemic. With the OPR hike, consumers who take on a housing loan will have to fork out more for their monthly repayments.
The rising interest rates might propel some property buyers to opt for cash financing instead of a housing loan. We can assure you that both have their benefits and there is no right or wrong decision. Instead, it all boils down to your financial appetite and personal circumstances. In this guide, we will cover some key questions to help you make the best decision.
1. What needs to be considered before buying a house with cash
Here are some of the things you need to consider before buying a property with cash:
Closing costs such as stamp duty, legal fees and mortgage insurance
Some might think that when you buy a house, the only extra cost you have to worry about is the 10% down payment. However, there are other important costs involved in the home purchasing process such as stamp duty fees, legal fees and home insurance.
An unavoidable cost, stamp duty is the tax imposed on your property documents during the sale or transfer of the property, as specified in the First Schedule of the Stamp Duty Act of 1949. This tax includes stamp duty on your property’s Sale and Purchase Agreements (SPA) which costs RM10, stamp duty on the instruments of transfer such as the Memorandum of Transfer (MOT) or Deed of Assignment (DOA), and stamp duty on your loan agreement at a flat rate of 0.5% of the total loan.
Legal assistance is required to prepare all the necessary documents and contracts to facilitate the property transfer. Legal fees for preparing the Sale and Purchase Agreement (SPA) range between 0.25% to 1% of the property purchase price and are charged based on a tier system.
Monthly maintenance fees for strata properties
Strata properties usually come with various facilities that are utilised by the residents such as lifts, walkways, swimming pools, gyms and community halls, and all of these facilities require proper maintenance and care.
Residents can expect to pay at least a few hundred ringgit each month in maintenance fees. This is because you are not only paying for the maintenance of these facilities, but you also are paying for the building’s management and administration staff. However, the fees do differ and are determined by:
- Parcel size: the amount of maintenance fee you pay is dependent on the size of your unit.
- Access to facilities: the more facilities you have access to (for example, resort-style pools, tennis courts and air-conditioning in the common areas), the more you will have to fork out
- Number of units: owners with units in a high-density development will pay less than owners in an exclusive low-density development.
You will also need some savings for home renovation and miscellaneous costs which might pop up down the road such as water leaks and plumbing issues.
2. Pros of buying a house with cash
Purchasing a property with cash outright can be freeing as you won’t be tied down to a debt obligation in the next 30 years or so. Here’s a list of other advantages:
a. Appear more interesting to sellers
Being a cash buyer provides you with a distinct advantage over other buyers who plan to take on a housing loan for the property purchase. This is because the seller will not have to worry about a buyer facing home loan rejection at the very last minute. This occurrence is quite common as many aspiring home buyers do not have a good Debt-to-Service Ratio (DSR).
Moreover, sellers who are anxious to close the deal will be more inclined to deal with a cash buyer as the property transaction can be finalised much quicker.
b. Big savings on interest rate payments
Is it cheaper to buy a house with cash? Yes, it is! The ultimate benefit of buying a house with cash is not having to make a monthly housing repayment, of which a large portion consists of the interest payable. Furthermore, you can avoid the lengthy mortgage process and its associated costs such as legal fees for the housing loan agreement and mortgage insurance.
Let’s put it in a clearer perspective using iProperty’s Home Loan Calculator. If one chose to take on a housing loan from the bank, the tenure would usually stretch up to 30 years. Should you purchase a RM500,000 home you will end up paying about RM277,452 in interest payments. Assuming you obtained 90% financing at an interest rate of 3.5%, this brings the total up to RM770,000 for a house that originally costed RM500,000. The total loan cost however varies between banks in Malaysia.
Therefore, it seems ludicrous not to opt for a cash purchase when comparing the original loan amount to the total interest paid.
c. Simpler and faster closing process
Usually, the entire closing process for a mortgage-financed house can take up to more than a month. Whereas the closing process for a cash buyer can happen as quickly as a week or two. This is because once the selling price is agreed on by both the house buyer and seller, both parties only need to sign the SPA and get it stamped, and the whole process is considered complete. We can see here that the amount of time you have to wait to close is very much reduced as there is no need to wait for the lender to approve, underwrite, and process your loan application.
You also do not have to go through the hassle of keeping track of all the paperwork borrowers must submit to their housing loan lenders – making it a bit less difficult for you as the buyer.
3. Cons of buying a house with cash
Buying a house in cash seems like a straightforward choice, however, it’s not as easy as it seems. Here are some disadvantages:
a. Your money is tied to the house
Once you decide to buy a house outright with cash, a large amount of money is tied to the property, limiting your liquidity and the possibility of other investments and purchases. Moreover, you can find yourself in a situation where you don’t have any emergency funds for unforeseen expenses which include repairs to your new property.
This is called being house poor where one spends too much money to become a homeowner. This makes it difficult for them to achieve other financial or personal goals despite whatever income class they’re in.
Therefore, reducing your debt obligation should not come at the expense of your overall financial stability.
b. Miss out on government exemptions
Buying a house with cash will have you missing out on existing government exemptions, which were introduced to assist Malaysians with their homeownership dream. One great example is the 2023 Stamp duty exemption.
During the recently tabled Budget 2023, the Malaysian government announced a stamp duty exemption for first-time home buyers on the instrument of transfer and loan agreement. For first-time home buyers who are looking to buy a property priced up to RM500,000, you are entitled to a 100% exemption, whereas for properties priced between RM500,000 to RM1 million, you will obtain a 75% stamp duty holiday.
c. Rising suspicion toward buyer
Some property buyers choose to take up a housing loan to not raise any alarms or suspicion by LHDN as it is considered unusual for people to purchase property with cash outright. However, as long as your money comes from legal and ethical sources, you will not encounter any problems. Now that we have gone through the pros and cons of a cash purchase, let’s evaluate whether you might be better off taking up a house loan and maintaining the cash at hand instead.
4. What needs to be considered when taking on a loan to buy a house
There are plenty of banks out there offering different housing loan products including basic term loans, full-flexi loans, semi-flexi loans, Islamic home loans and fixed rate loans. Here are the few things you need to consider:
Your Debt-to-Service Ratio (DSR)
The debt service ratio, also known as DSR, is the ratio of a person’s total debt to their household income, which measures a person’s ability to meet their debt obligations. Generally, your DSR should not exceed 70% and some banks require an even lower percentage. Thus, having a DSR percentage between 50-70% would indicate a good DSR.
Why is having a lower DSR better you may ask? This is because banks use your DSR to determine how much of your income is used to pay off loans and other debt obligations, as well as whether you can afford the housing loan you’re applying for.
Your CCRIS and CTOS
Banks will also check on your credit score on CCRIS and CTOS before approving or rejecting your application. So, what are CCRIS and CTOS?
a. Central Credit Reference Information System (CCRIS)
CCRIS is a system built by Bank Negara Malaysia’s (BNM) Credit Bureau which provides standardised credit reports and information about potential borrowers. A CCRIS credit report only includes data from the last 12 months and consists of three major areas of credit-related information, which are outstanding credit(s), special attention account(s) and credit application(s).
b. The CTOS Data Systems Sdn Bhd (CTOS)
Unlike CCRIS which is built by BNM, CTOS is a private company that offers credit reporting services which archive a person’s or company’s entire credit history. A CTOS score is computed using credit data from both CCRIS and CTOS’s database, which ranges between 300 and 850.
It is always good to be aware of your credit score not only when purchasing a property. This is because it acts as an indication for financial institutions to know whether you are a high-risk borrower or the opposite, making it easier for you to know whether your housing loan application will be accepted or not.
Most banks will require home buyers to purchase insurance as part of the housing loan package to ensure the mortgage is paid for in the event of death or disability. Housing loan insurance options in Malaysia include Mortgage Reducing Term Assurance (MRTA), Mortgage Level Term Assurance (MLTA), and term life insurance.
5. Pros of taking on a housing loan
The most obvious advantage a person can get from applying for a house loan is having the chance to obtain their dream house. But there are a lot more benefits that can be enjoyed by borrowers and here they are.
a. More financial flexibility
By taking on a housing loan whether it’s the usual Term Loan that requires you to pay a fixed amount or a Flexi Loan where the loan repayment is much more flexible, you will be able to feel secure as there is still money in your hands. Not all of your money is tied to the property.
Considering there are plenty of additional costs associated with homeownership (stamp duty, legal fees, property fees and many more), taking up a housing loan frees your savings from disappearing in one go. You can then opt to divert the remaining cash you have into other forms of investments such as gold, shares, or even purchasing another property.
NOTE: You have to remember that property is not a liquid asset and you cannot turn a property into cash overnight. Hence in times of an emergency where you need a sudden cash injection, you can rely on these other investments (gold, shares, etc) – to obtain money immediately.
b. First-time home buyers can opt for other home financing options
The government has put in the effort to provide a chance for the B40 and M40 income groups to own their own property via various housing schemes.
- Housing Credit Guarantee Scheme (HCGS) – Under Syarikat Jaminan Kredit Perumahan Bhd (SJKP), this scheme allows non-fixed income earners a chance to obtain financing from participating banks that can go up to RM400,000 including principal financing amount, MRTA/ MRTT, LTHO, solicitor’s fee and valuation fee. It also includes 100% guarantee financing too!
- Residensi Wilayah Keluarga Malaysia (RUMAWIP) – suitable for first-time homebuyers looking for properties around the Federal Territories of Malaysia with a 100% loan.
- Rumah Selangorku (RSKU) Scheme – a people-centered housing scheme designed to assist middle-income families to purchase affordable homes in key urban areas throughout Selangor.
c. More flexibility for property investors
Having extra cash in hand allows investors to invest in other rental properties. This can be made by securing 2-3 housing loans for different properties, which then can be rented out simultaneously. By marketing multiple houses to rent, investors can gain passive income each month. Any cash in hand can be utilized for renovations or furnishings that might be necessary to attract better tenants. This way, the investor will be able to and at the same set a higher rental price to match the rental property value.
Here are some tips and tricks for future investors who are planning to invest in a rental property in Malaysia.
REMINDER: It is not as easy to obtain a high margin of financing (MOF) for your second or third home loan as banks will be looking at your credit score. Typically, borrowers will qualify for a 70%-80% MOF for subsequent loans.
6. Cons of taking on a housing loan
a. Higher interest rates
It is more expensive to take on a housing loan in H2 2022 as the OPR has been increased by 0.5% this year. When BNM raises OPR, however, banks’ interest rates will be revised upward accordingly and thus making it expensive for consumers to get a loan. A 0.25% increase in OPR for a RM500,000 home loan with a 30-year tenure is likely to increase the monthly instalment payment by RM71. This means that the borrower will have to pay an additional RM25,560 in total for interest payments in that 30-year period.
NOTE: Recently, a new Reference Rate Framework is applied to all new retail floating-rate loans known as Standardised Base Rate (SBR), replacing BR and BLR. Effective on 1 August 2022, this new framework aims to help consumers make more informed decisions by increasing loan transparency and compatibility across all Malaysian banks.
b. Possibility of loan rejection
As aforementioned, many borrowers do not have a healthy DSR or a good CCRIS score. This eliminates the chances for borrowers to own property, and the only option left is to continue renting for an extended period. It might be disappointing to be turned down for a housing loan but do note that banks have placed strict requirements for loan approval to safeguard the bank and you, the prospective homeowner.
TIP: Check out LoanCare on iProperty.my to know your home loan eligibility with up to 17 banks, making it easier for you to calculate and compare your options without going through another 3-6 months waiting period.
c. Long-term commitment
Taking up a housing loan is a long-term commitment, as the tenure usually goes up to 30 years. Let’s imagine a situation where a borrower with a gross income of RM5,000 per month has to pay back their monthly instalments on top of other financial obligations such as a car loan and PTPTN. They will not be left with much money to support their living expenses. Let’s take a look at an example below:
Money left for living expenses = Net monthly income – [house loan + car loan + PTPTN loan]
= RM4,407 (after tax and EPF) [RM3,000 + RM600 + RM300]
= RM4,407 – RM3,900
With the remaining balance left, you might need to think twice before purchasing a house via housing loan. Ask yourself beforehand, will you be able to survive on RM500 per month for groceries, entertainment, and money for your family for the next 30 years? If no is the answer, then you might as well opt for the earlier option which is buying a house via cash instead.
So, which is the best option for you as a homebuyer?
We have listed down all the things you need to consider when buying a house with either cash or a housing loan, including its pros and cons. While taking out a loan gives you more financial flexibility, paying for a house in cash helps you to save a lot on interest. However, there is no certain way to determine whether one approach is better than the other; it all relies on the circumstances of the individual.
7. Is it worth buying a house with a loan?
According to experts, even if you have the money to purchase a house in one go, it is advised to take a housing loan instead. Instead of putting down all your money in a lump sum payment, you can opt to put down a larger down payment of 30-40% or select a shorter loan tenure of say 20 years – where the monthly repayments might be higher. But, this way you still get to save quite a bit of money on interest payments down the road. Refer to the 2 examples below:
The buyer can opt for a 30% down payment or shorten the tenure to 20 years to save on interest payments for an RM500,000 house.
- 30% down payment – interest payment is only RM215,700 compared to the RM277,000 (under the conventional mortgage with 10% downpayment)
- 20-year loan tenure – interest payment is only RM176,300 compared to RM277,000 (under the conventional mortgage with a 30-year tenure)
A housing loan is suitable for:
- Consumers who do not have substantial savings to cover any miscellaneous costs that come with homeownership (legal fees, maintenance, and renovations)
- Property investors who are looking to profit from rental income
Investors will have to keep cash flow in mind when planning to make money out of rental properties. This means their monthly rental income must cover the monthly instalments and other costs that were used to makeover the house for renting out purposes. We teach you all you need to know about investing in a rental property in Malaysia and ways to gain a tidy profit from it.
At the end of the day, housing loan borrowers are not too worse off. This is because property values tend to increase over time. Hence, homeowners will get to enjoy capital appreciation of their property in the long term. This would be useful should they decide to upgrade and sell off the home. Your RM500,000 house today could be worth 5-10% more in 10 years or so.
TIP: If you have extra cash in hand, you can opt to pay higher monthly instalments for the remaining loan tenure. This will then help bring down interest payments for the remaining of the loan tenure, allowing you to avoid paying excessive bank interest.
8. Is it worth buying a house with cash?
Having enough cash to buy a property outright is a privilege owned by some property owners as many do not have the choice but to take on a 30-year house loan from the bank to purchase a property.
In some cases, people prefer to buy a house where they see their family and themselves staying in for the next 20-30 years without having to worry about carrying their debt forward. Imagine if an older home buyer in his 50s chooses to take on a housing loan, it might be impossible to take on a 30-year housing loan Therefore, this option is suitable for the older generation as they can easily purchase a house without having to worry about passing down the debt to their children. Buying a house with cash is also suitable for financially stable people, especially those who have already saved sufficient money for emergencies, child-related expenditures, and future medical expenses.