Purchasing a home is one of life’s biggest financial milestones for many Malaysians. It seems like the most natural and conventional course to take as one enters adulthood is to get a job and then buy a property.
However, the current property market has been soft since 2014, and according to the 2017 market outlook report by CBRE/WTW, a real estate company, loan growth is expected to slow further due to more stringent loan requirements from financial institutions and overall concern over economic uncertainties.
This does not deter many millennials to still aspire to buy their first property. According to the latest survey by HSBC, Beyond the Bricks, 94% of millennials in Malaysia want to buy a home, but the biggest determining factor for any homebuyer is often the cost of the home.
According to National Property Information Centre (Napic), the average house price in Malaysia in 2015 stood at RM315,287, while average income was at RM6,141. Overall, the median multiple affordability was at 4.3, which put us in the ‘seriously unaffordable’ range. Median multiple refers to the house-price-to-income ratio, essentially how many times the property price is compared to your annual income.
The Khazanah Research Institute report titled Making Housing Affordable broke it down further according to states. The report found that properties in Kuala Lumpur, Penang and Sabah are ‘severely unaffordable,’ while properties in Selangor are ‘moderately unaffordable’.
This means that the house-price-to-income ratio, or median multiple, was over 5.1 times for those that are labelled ‘severely unaffordable’ and 3.1 to 4.0 times for ‘moderately unaffordable’. So you could say we’re pretty well seated in the unaffordable range no matter how you put it.
Of course, this does not mean millennials in Malaysia have to bid their dream of becoming a homeowner goodbye. The ratio is just a gauge against the median income. With some finesse in managing and planning finances, millennials would still be able to achieve their goal.
There are a few steps you’ll need to take and the first one is knowing how much you can afford. This will eliminate some anxiety by allowing you to narrow down your choices, and thus ensuring you won’t fall behind on mortgage payments.
How much house can you afford?
Buying a property is a major financial decision and should never be taken lightly. If you were to purchase a unit from a condominium in Damansara North, that would likely cost you RM500,000.
How much cash do you need to have to purchase a RM500,000 property? Will you be able to afford the down payment or the monthly repayment with your current income? Can you even get a home loan of that amount?
Financial institutions consider your debt service ratio (DSR) when they determine the loan amount you are eligible to borrow. Your DSR is the proportion of your income that is already spent on debt repayments, such as auto loan, personal loan or home loans. They’ll then use the remaining available income to see how much you can afford for the loan you’re applying for.
Some banks use gross income, while others use net. If you want to calculate it, it’s better to assume the bank you are applying for uses your net income. Your DSR including the repayments of the loan you’re applying for should not be above 60% if you want to qualify for the loan.
Here’s how to calculate your DSR:
Based on the formula above, the maximum loan you can get is RM325,000. That means you can only afford properties priced at RM360,000 and below.
What about the upfront payment?
Buying a property is more than just getting a loan and paying the monthly instalment. The biggest challenge most property buyers face is coming up with the initial cash to purchase the property of their choice.
Buyers are required to pay 10% down payment and get a loan of up to 90% to purchase a property. For example, if you are buying a RM500,000 property, you will need at least RM50,000 in cash to pay for the down payment.
The HSBC survey found that 75% of those who intend to buy their first property have not yet saved enough for the initial deposit.
Even if you manage to fork up the 10%, there are also other upfront payments you need to pay.
Two-thirds (68%) of millennials who bought a home in the last two years ended up overspending their budget. This is because only 15% of these millennials have a precise and accurate budget in mind beyond paying for the down payment.
The unexpected costs that caused them to overspend are renovation costs (63%), legal fees (47%) and buying furniture (43%). You may be able to save or cut on renovation and furnishing, but other miscellaneous home buying fees are unavoidable, such as stamp duty, legal fees, and processing fees as well as insurance premium.
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 alone – which will have to be borne by you, the buyer. Add in the renovation and furnishing costs and you’ll soon see why it’s easy to bust the budget you had set before.
Due to lack of planning, Malaysians are the second highest in overspending in their home purchase among nine countries surveyed.
What can you do to increase your eligibility?
The most straightforward way to increase your eligibility is, of course, to increase your income. Using the example above, if your salary is raised from RM4,500 to RM5,500, your DSR would have been 60% instead of 74%, making you eligible to get a loan amount of RM450,000.
Although 71% of millennials think they are not earning enough to afford the property of their choice, it is not always possible to get a salary increment. In that case, it is best to be creative and diligent in your budgeting to achieve your goal. You should always strive to be precise and accurate with your budget to take into account many unexpected costs that may come your way.
Of the millennials who are planning to purchase a property in the next two years, 63% of them have only an approximate budget in mind and 22% of them do not even have a budget in mind.
Without a budget, your goal of buying a property can easily be derailed by a single unexpected cost.
Other than reining in your budget, you can also boost your eligibility by managing your debts better. Your DSR is probably over the recommended percentage due to high debt commitments. One way to manage that better is to clear off debts as soon as you can, or through a debt consolidation plan.
For example, a few high credit card debts and personal loans can be consolidated into a single low interest rate personal loan.
In preparation for your home purchase, you should also hold off taking on anymore credit facilities so your DSR won’t be affected when you are ready to apply for a home loan.
By being diligent in your debt repayment and prudent in your spending, your dream of being a homeowner may soon be realised.
