In the first part of The Basics of Housing Loan series, we have defined some very important terms that will help you get your head around understanding housing loans in Malaysia.
Let’s carry off from there and talk about how much you can or should borrow for your dream house.
How much can I afford?
As long as you satisfy some key criteria, banks will generally lend you up to 95% of your home’s value. When determining how much to lend you, banks consider a number of things including:
- How much you earn – The higher your income, the easier it is to obtain a home loan from the bank. This is because the more you earn, the better your ability to repay the loan (which translates to lower risk to the bank)
- Your existing debt – Some examples can include your car loan, personal loan and credit cards. The more debt you have, the harder it is to get a home loan from the bank.
- How much savings you have – Once again, the more you have in savings, the easier it is to obtain a housing loan.
A good rule of thumb to determine how much you can afford is to ensure that your monthly home loan repayment doesn’t exceed a third of your income.
Another way to check your affordability is by calculating your personal Debt Service Ratio (DSR). The DSR is calculated as [all your monthly debt repayment obligations] divided by [your monthly take-home income]. Bank Negara recommends that Malaysians do not exceed a DSR of 60%.
Now that you know how much you can afford, the next question is – How much should you borrow?
This is a difficult question to answer, and there is no right or wrong answer. However, you should borrow nothing more than what you can afford. Also, be prepared to pay a higher monthly instalment if you take up a housing loan with a shorter term, or choose a higher margin of financing (can’t remember what this is? Check out Part 1 of this series).