Home Correctional service Don’t let home loans put you out of business

Don’t let home loans put you out of business

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Bankruptcy does not free you from all your debts, but will prevent you not only from traveling abroad, but also from obtaining future credit.

Buying a property is the biggest financial purchase and commitment the average rakyat will make in their lifetime. Therefore, the National House Buyers Association (HBA) cannot stress enough that careful thought and planning should be done before taking out a home loan to purchase a property.

According to the Bank Negara Malaysia Financial Stability Review Report for the second half of 2021 (BNM FSR 2H2021), the median property price in Malaysia is 4.7 times the median income in Malaysia, which can be classified as “severely unaffordable” according to international standards. (Source: https://www.bnm.gov.my/documents/20124/6459002/fsr21h2_en_book.pdf – page 27)

This means that housing prices are beyond the level of affordability of normal wage earners; and if they manage to get a loan to buy one, they will be saddled with a heavy financial burden, which can easily descend into financial ruin if they are unable to honor the loan at any time during the tenure of several decades.

HBA is not an accredited financial planner, but based on the many cases brought to our attention, we would like to offer some advice to aspiring first-time homebuyers.

Don’t take out other loans before buying your first home

It is very common among young people to buy a car first before a house because the former seems more accessible. However, if owning a home is one of your primary goals, the most important piece of advice we can give you is this: don’t take out a car or personal loan until you’ve purchased your first home.

Based on the BNM FSR 2H2021, 65% of borrowers already have either a car loan or a personal loan, thus limiting their ability to take out new loans for housing.

Generally, Malaysian banks consider that:

  • single loan payments must not exceed one-third (or 33.3%) of gross income, and
  • combined loan payments must not exceed half (or 50%) of gross income.

This means that if you earn RM3,500 per month, the maximum loan payment banks will give you is RM1,167 for a single loan and RM1,750 for combined loans.

Let’s say you are looking to buy a property worth RM290,000, which will be financed with a 30-year mortgage of RM261,000 (90% finance margin) at an effective interest rate of 3.25% per year The monthly installment for the housing loan will be RM1,136.

If you have a car loan for which you pay a monthly installment of RM800, will your car loan affect your mortgage eligibility?

Without auto credit (RM)

With car credit (RM)

Monthly income

3,500

3,500

Maturity of car loan

800

Housing loan installment

1,136

1,136

Total monthly loan payments

1,136

1,936

First loan payment/monthly income

32.5%

22.9%

Combined monthly income/loan tranche

32.5%

55.3%

Maximum tranche of home loan eligible for

Not applicable

950

Based on the example above, if you have no existing loan obligations, you will qualify for the above housing loan, which has a monthly loan installment of RM1,136, as it is only 32.5% of your monthly income and is below the general rule of 33.3%.

However, if you have an existing car loan with a monthly installment of RM800, you will not qualify for said home loan because the combined car loan and home loan installments are 55.3%, which is higher than the rule of thumb of 50%. The maximum payout you will be entitled to is only RM950, which will limit your choice of properties to buy.

Able to maintain a minimum standard of living after loan repayment

The second tip is to make a proper budget on what you can actually afford before buying your first home. You need a large budget to see if you can afford the monthly loan payments and maintain your current lifestyle.

You need to consider potential dependents such as children or aging parents, and whether you can still afford the loan installments after that. There’s no point in having to skip meals or go childless just to afford a home.

You should also factor additional costs such as maintenance fees and sinking fund contribution for stratified properties, insurance, exit rent and appraisal fees into your monthly budgets.

Also, ideally, after taking into account all the above expenses and loan installments, you should have at least 10% of your gross income in savings to deal with sudden emergencies, a habit that most Malaysians do not. don’t have.

According to a study by Perbadanan Insurans Deposit Malaysia (PIDM), the majority of respondents (55%) have less than RM10,000 in savings available to draw on in an emergency. (Source: https://www.pidm.gov.my/en/info-centre/reports-and-insights/savings-report#:~:text=Many%20Malaysians%20lack%20the%20ability,called%20to%20withstand%20financial %20shocks)

Don’t feel pressured to buy until you’re financially ready

The next tip is to not force yourself to buy a property. It’s going to be your biggest purchase of your life and you don’t want to be pressured, coerced or forced into buying your first home just because all your friends or relatives have already done so. If you’re not ready to buy your first home, just continue renting or staying with your parents/parents.

For those who rent, make sure your rental rates are lower than the equivalent cost of a home loan to buy the same property. If not, you better buy said property, right? Your current rental should still be a steep discount compared to owning the same property so that you can use the savings as funds to acquire your dream home in the future.

The old can be gold

One of the biggest mistakes first-time home buyers make is only looking at new properties. The problem with this is that prices for new developments tend to keep rising, leading aspiring home buyers to spend too much or buy something too far away or too small.

Therefore, we advise home buyers to consider completed properties as old can be gold. The advantage of buying existing properties or secondary properties is “what you see is what you get”. You can see the actual property and the surrounding neighborhood and decide if you like it. By contrast, buying brand-new properties means relying solely on developers’ “artistic impressions”, which, once completed, sometimes aren’t even close.

Plus, existing properties are usually already renovated, so if you like it, you don’t have to do anything but move in straight away. On the other hand, new properties require a lot of expense to get up and running before they are ready to move in.

However, secondary properties require the buyer to exercise due diligence, such as properly inspecting the condition of the property and ensuring that you are dealing with the actual owner.

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 home loan. There are serious legal and financial consequences if you cannot meet your loan obligations, including being declared bankrupt.

Aspiring first-time home buyers should understand all of their financial and legal obligations before making a purchase. Be sure to look before you jump into signing on the dotted line for your dream property.

Avoid the stigma of being declared bankrupt. Bankruptcy does not free you from all your debts, but will prevent you not only from traveling abroad, but also from obtaining future credits.

This article is co-authored by attorney Sharifah binti Razali and Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), an all-volunteer non-governmental, non-political, non-profit organization. The link: www.hba.org.my