How much should you be earning?
When it comes to remaining realistic in one’s expectations for the price of a property you can afford, the general rule of thumb is to refer to the Debt Servicing Ratio (DSR). It should not exceed 70% and is a percentage that shows how much of your income is being used to pay off debt. It also indicates if you can afford to take up that housing loan you have in mind.
The formula generally used by banks to assess a borrower’s ability to repay his/her monthly instalments is as follows:
DSR = (Debt / Net Income) x 100
Debt in this instance refers to all existing financial obligations such as credit card repayments, personal and student loans. Net income refers to your income after the necessary deductions have been made, such as income tax and EPF.
Most banks have a DSR cap of 65% to 70%, so it’s crucial that you first calculate your repayment ability for the property you have your eye on before making the next move. The last thing you’d want is to find out that you don’t have enough salary for housing expenses!
For instance, let’s assume you earn RM5,000 a month. In order to fulfill the minimum 70% DSR rule, your total debt cannot exceed RM3,500.
DSR = RM3,500 / RM5,000 x 100 = 70%
Now, let’s say you have the following financial obligations:
- Car loan: RM600
- Credit card repayments: RM250
- PTPTN loan: RM100
Current total debt = RM950
Therefore, when taking up a home loan, your monthly instalment figure must not be more than RM2,550 (RM3,500 – RM950).
So which property would you be eligible for?
To help you figure out which property price range you should be targeting, a table has been created (below) to detail the estimated home loan repayments for a few price ranges that are considered affordable to most first-time Malaysian homebuyers.
|House price (RM)|
|Loan of 90% (RM)||Tenure (Years)||Average monthly instalment (RM)||
Minimum household net income (RM) [Current Debt + Monthly Instalment]/70%
*The calculations above assume the following: Downpayment of 10%; Market interest rate of 4.7%; Current total debt amount of RM950; DSR of 70%. The calculations were tabulated using Loanstreet’s online calculator.
Do take note that there are other expenses to be considered when it comes to purchasing a property; monthly instalments may take up the bulk of it, but you will also have to factor in stamp duty, legal fees, bank processing fees and insurance costs. It’s important that you include all these complementary expenses into your budget before coming to a decision.
Which location can your salary afford?
Now that you have a rough idea of the price ranges you should be looking at (based on the minimum household net income), the next thing you’d want to determine is which area you should be keeping an eye on. While many long for an address in a more established neighbourhood, the hefty price tag is enough to deter even the most ambitious of dreamers.
Nevertheless, there are still plenty of residential projects located in up-and-coming districts that are seeing upgrades in road networks, public transportation infrastructure and amenities. All of these will contribute to a higher standard of living, while still remaining within the affordable range.
In order to provide readers with an affordability benchmark for various areas, a heat map has been drawn up using the latest data from brickz.my to show some of the median prices per sq ft for condominiums. The median figures displayed are from December 2016 to November 2017.
For example: If you’ve calculated your DSR for a salary of RM4,000 you would thus come up with the price tag of approximately RM400,000. As such, you should narrow down your home search to areas such as Puncak Alam (RM415,000) which has properties around that mark.
How would you fund your downpayment?
Looking for your dream home can be tough enough, but coming up with ways to fund the 10% downpayment can be an even bigger headache, especially if you’ve just joined the workforce and don’t have significant savings. Nevertheless, there are plenty of alternatives out there which will support your home ownership dream. Here are some of the solutions that you can opt for:
1) A low-interest rate personal loan
This might not be an ideal option but it can be very helpful in times of financial need. Applicants who have a clean credit record will be able to negotiate with the banks for a lower interest rate. If you are applying for a loan from a bank in which you have an existing account, the approval process can be a whole lot faster.
Make sure to shop around for the best product – look out for one which offers the most suitable tenure period, interest rates and monthly instalment amounts. This way, you will be able to finish paying your personal loan repayments before you even begin paying your mortgage loan in two or three years.
Another alternative would be to withdraw from your Employees Provident Fund (EPF) Account 2. This option is possible for aspiring homebuyers:
- Who are buying a residential property.
- Whose financing option has been approved by the bank.
- Whose Sales and Purchase Agreement (SPA) has been signed, but not more than three years.
- Who has never made a withdrawal before for a house purchase.
Who says buying a property has to be difficult?
Not us, that’s for sure! As long as you’ve conducted a thorough research of the locations to focus on – based on your own capabilities and the available financing options – you won’t stray too far from the right property. If you need a little extra push in the right direction, use this comprehensive tool to help determine your home loan eligibility across 15 banks, free of charge!
This article was repurposed from "How Much Should Malaysians Earn to Afford a House in KL?", first published on iProperty.com.my