How Do You Calculate How Much Home You Can Afford?
“Can I afford to buy a RM500,000 home with a RM5,000 salary?”
“What kind of income do I need to buy a RM700,000 property?”
“How much should I spend on my mortgage?”
You’ve probably asked yourself variations of these questions while dreaming about buying your first home; and realised that they’re not easy to answer. So, here’s your guide to estimating how much you can afford to spend on a home.
What is the maximum home loan you can get?
The maximum home loan you can get depends on your debt service ratio (DSR). This refers to how much of your income is being used to service debt repayments. Banks use the DSR to gauge your ability to repay your home loan. If your DSR is too high, your bank may not approve your home loan application. Here’s how the DSR is calculated:
DSR = (Total monthly commitments ÷ net income) x 100%
Banks will only allow you to borrow up to a certain amount of your DSR (across all your commitments). This could be around 60% to 75%, but each bank will have different requirements. Here’s an example of how this works:
- Say you have RM1,100 in monthly commitments and RM5,000 in net monthly income – this gives you a DSR of 22%.
- If your bank will only lend you up to 70% of your DSR, this could mean that they’ll allow you to use up to RM3,500 (70% x RM5,000) of your salary on debt commitments.
- Since you already spend RM1,100 on existing commitments, this means your maximum monthly mortgage allowed by the bank could be RM2,400 (RM3,500 – RM1,100).
- At a loan tenure of 35 years and a 3.5% interest rate, this could mean a maximum home loan of around RM580,000.
Your bank may have an online calculator that you can use to estimate your loan eligibility. However, each bank has different DSR requirements, and may have different ways of calculating your DSR, so it’s worth checking with multiple banks.
How much home can you afford based on your salary?
While your bank may lend you up to a certain amount, you may not want to take the biggest loan available. That’s because spending too much on a new home can strain your finances. It could make it harder for you to meet other financial commitments, such as day-to-day living expenses, saving for retirement or even putting funds towards that overseas trip you’ve always wanted.
So how much should you spend on a home? The National House Buyers Association’s (HBA) suggests not exceeding one third (or 33.33%) of your DSR on a home loan.
If you spend a third of your net salary (we’ll round that down to 30%), here’s how much you may need to earn to afford these properties, assuming you’re a first-time home buyer who can borrow up to 90% of the property value.
|Property price||Down payment (10%)||Monthly repayment||Net monthly salary|
However, the estimates above are just a general guideline. You may need to lower your expectations if you have many financial obligations.
Some financial experts also suggest an alternate rule of thumb to gauge home affordability. The 28/36 rule suggests that you shouldn’t spend more than 28% of your gross monthly income on housing, and no more than 36% on debt obligations. The 28% includes spending on all housing expenses, which brings us to our next section…
What are the other costs of homeownership?
Owning a home doesn’t just mean paying for a mortgage. You’ll also have to consider:
- Utilities. This can cost around RM200 a month for a 915 square foot apartment in Kuala Lumpur, although it depends on other factors like the size of your household and usage. A 100 Mbps can knock you back another RM100 per month.
- Maintenance and repairs. Leaky pipes, peeling paint and busted air-conditioners…a home can be expensive to maintain. According to the Household Expenditure Survey Report in 2019, Malaysians allocate 4.4% of their monthly expenditure to furnishings, household equipment and maintenance.
- Management fees. If you live in a high-rise residence, you’ll need to pay monthly management fees. Your rates will depend on the location and size of your property (e.g., RM0.35 per square foot).
- Residents’ association fees. If you live in a gated or guarded residential area, you may need to pay additional fees.
- Insurance. There are a few types of policies associated with homeownership, such as mortgage life insurance, houseowner and householder insurance, as well as fire insurance. Your costs will depend on which policies you choose to take up and the value of your home.
- Assessment tax and quit/parcel rent. As a property owner, you’ll need to pay an annual assessment tax, which is generally 4% of your property’s annual rental value. You’ll also need to pay a quit rent (for landed properties) or a parcel rent (for strata properties), which is charged by square feet (e.g., RM0.035 per square foot).
These additional costs can make homeownership a lot pricier. Before you commit to buying a home, it’s worth estimating how these costs will strain your budget.
Know what you can afford
In short, your maximum home loan depends on how much your bank is willing to lend you. A lower DSR will increase your chances of getting your home loan approved, as well as help you score a bigger home loan. But don’t take on the maximum home loan available if it means straining your finances. A general rule of thumb is to keep housing expenses below one third of your income, though you may need to adjust depending on your financial circumstances.