|Without car loan (RM)
|With car loan (RM)
|Car loan instalment
|Housing loan instalment
|Total monthly loan instalment commitments
|First loan instalment / monthly income
|Combined loan instalment / monthly income
|Max housing loan instalment for Albert after adjusting for the existing car loan
The Malaysian Department of Insolvency reported that 287,411 people in the country had been declared as bankrupt as of March 2022. It is a nightmare when you end up being declared bankrupt, as your life will be restricted for the medium to long term.
Aspiring home buyers would want to asses their financial health before taking on a loan or debt – The possible repercussion of failing to repay your loan obligations includes being declared bankrupt.
HBA would like to remind all aspiring house buyers that buying a property is the single biggest financial purchase and commitment that the average Rakyat will make in his or her lifetime and careful thought and planning must be done before buying a property and taking on a housing loan.
Based on Bank Negara Malaysia’s Financial Stability Review Report Second Half 2021 (BNM FSR H2-2021), the median property price in Malaysia is 4.7X more than the median income in Malaysia and can be classified as “Seriously Unaffordable” by international standards.
This means that house buyers have to pay more for their houses as compared to what they can ideally afford, in the long run. When one is saddled with burdensome housing loans, this can lead to financial ruin if one is not able to service the monthly debt obligation over the loan tenure.
HBA is not an accredited financial planner but we would like to offer some layman’s financial advice to aspiring house buyers on how to determine if they are ready to buy their first home.
1. Don’t take a car loan or personal loan before you buy your first home
The most important advice for aspiring first-time home buyers is to not take a car or personal loan until you have bought your first home. Based on BNM’s FSR H2-2021, 65% of borrowers already possess either a car or personal loans, thereby limiting their capacity to take on new borrowings for housing.
Typically, the ‘rule of thumb’ by banks in Malaysia pertaining to loan instalments are:
- single loan instalments should not exceed 1/3 (or 33.3%) of the monthly gross income; and
- combined loan instalments should not exceed 1/2 (or 50.0%) of the monthly gross income.
Let’s take the example of Albert who is currently earning RM3,500 a month. Based on the above rule of thumb, the maximum loan instalment that banks will give to Albert is RM1,167 for a single loan instalment and RM1,750 for all combined loan instalments.
Albert is now looking to buy a property worth RM290,000 and which will be financed via a 30-year housing loan of RM261,000 (90% margin of financing) at an effective interest rate of 3.25% p.a. The monthly instalment for the housing loan will be RM1,136 per month.
Will Albert qualify for the above housing loan and what if Albert already has an existing car loan with a monthly instalment of RM800 per month (which may not seem to be very high)?
Based on the above example, if Albert does not have any existing loan obligations, he will qualify for the above housing loan which has a monthly loan instalment of RM1,136 as it is only 32.5% of his monthly income and is below the rule of thumb of 1/3 or 33.3%.
However, if Albert has an existing car loan with a monthly instalment of RM800, he will not qualify for the said housing loan as the combined loan instalments of the car loan and housing loan is 55.3% and is above the rule of thumb of 1/2 or 50%. The maximum instalment that Albert will be able to qualify for is only RM950 which will limit his choices of properties that he is able to buy.
DID YOU KNOW: In 2020, an amendment was made to the Insolvency Act, to raise the bankruptcy threshold from RM30,000 to RM100,000. Hence, the decrease in bankruptcies year on year, reported in the media should be taken with a grain of salt.
2. Able to maintain a minimum standard of living with some savings
The second piece of advice that we wish to give to all aspiring first-time home buyers is to do proper budgeting on what they can really afford before buying their first home. Aspiring first-time house buyers need an extensive budget to see if they can afford the monthly loan instalments and maintain their current lifestyle.
After that, they need to factor in potential changes in lifestyle such as having children or ageing parents to take care of and whether they can still afford the loan instalments. There is no point in having to skip meals or not having children just to be able to afford the housing loan instalment.
They also need to factor in additional costs other than just the monthly housing loan instalments such as maintenance charges and contribution to sinking funds for stratified properties, insurance, quit rent, and assessment charges into their monthly budget.
In addition, ideally, aspiring house buyers should have at least 10% of their gross income as savings after factoring in all the above expenses and also the loan instalments to cater for sudden emergencies as many people in Malaysia don’t have enough savings for emergencies.
Based on a study by Perbadanan Insurans Deposit Malaysia (PIDM), a government agency under the Ministry of Finance, the majority of respondents (55%) have less than RM10,000 in available savings to draw on in the event of an emergency.
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3. Don’t get pressured to buy property until you are financially ready
Malaysian youths should also not get pressured into buying a property. This will be your single, largest purchase in your entire lifetime and you do not want to be pressured, coerced or forced to buy your first home just because all your friends or relatives have already done so.
If you are not ready to buy your first home, just continue renting or staying with your parents/relatives. For those who are renting, do make sure that your rental rates are lower than the equivalent cost of a housing loan to purchase the same property. Else, you are better off buying the said property, right? Your current rental should always be a steep discount to owning the same property so that you can use the savings as funds to acquire your dream home in the future.
4. ‘Old can be Gold’ – Look towards subsale homes
One of the biggest mistakes that first-time house buyers make is that they want a brand-new property. However, the problem is that some property developers keep on increasing their property prices. This means that aspiring house buyers either overspend on their purchase and get into financial difficulty in the future or they settle for a property that is much further or much smaller than planned. They will later regret it because the commute time is too long or when they have children and there is just not enough space in the property.
Our other piece of advice is that “old can be gold” and to ask aspiring first-time house buyers to also consider existing completed properties or subsale homes. There are benefits of buying secondary properties, the main one being “what you see is what you get”. You can view the actual property and the surrounding neighbourhood and decide if fits your needs and requirements. In contrast, buying a new-launch property means relying on just the artist’s impression from developers which upon completion, may differ in terms of design or size.
Also, many existing properties are already renovated so you won’t have to spend more monies on renovations and refurbishments. However, for new-launch properties, the buyer will need to spend quite a bit to get it up and running before being able to move in.
Nevertheless, buying secondary properties requires the buyer to conduct some due diligence such as properly inspecting the condition of the property and ensuring that you are dealing with the actual owner of said property.
In conclusion, buying a property is not a simple process. It will be your most expensive purchase and you will be tied to a long-term housing loan. There are severe legal and financial consequences if you cannot meet your loan obligations including being declared bankrupt.
Aspiring first-time home buyers must understand all their financial and legal obligations before making the purchase and as the saying goes ‘look before you leap’ and sign the dotted lines for your dream property.
Avoid the stigma of being declared bankrupt. Bankruptcy does not release you from all your debts but will restrict your ability to travel overseas. It can also obviously affect your ability to obtain future loans.
This article is jointly written by Lawyer Sharifah bt Razali and Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-government, non-political and not-for-profit Organisation manned wholly by volunteers.