Budgeting 101: What To Prepare For Before Purchasing A Property?

PropertyGuru Editorial Team
Budgeting 101: What To Prepare For Before Purchasing A Property?
Here’s a 6-letter word you’ll have to come face-to-face with once you officially join the rat race to owning your first property – B U D G E T.
You can try to run away from it, but the sooner you’re clued in to what’s required, the better it is. A mistake in a property purchase can be very costly affair, and sometimes, it’s about asking the right questions and reaching out to the right people.
We’re glad that you’re at this page! Investing in your knowledge is the best first step, and the key to a successful and smooth home ownership journey. Here’s a quick break-down of the costs you need to prepare for:
What you need to budget for
What is the rough estimate
Earnest deposit
2% of the agreed purchase price
Down payment
10% of the agreed purchase price (total including earnest deposit)
Sale and Purchase Agreement (SPA)
Legal fees, stamp duty, and legal disbursement fees
Loan agreement
Legal fees, stamp duty, and legal disbursement fees
Real estate agent’s commission
Maximum of 3% of the property’s sale price
Valuation fee
From 0.25% to 0.04% of the sub-sale property’s value
Transfer of ownership title aka Memorandum Of Transfer (MOT)
Depending on the house price (which tier it falls in)
Government tax on legal agreements
6% of total lawyer’s fees
Bank processing fee
RM50 to RM200
Perfection of Transfer (POT)/Perfection of Charge (POC)
  • POT: The cost includes an MOT’s professional lawyer’s fees, stamp duty, as well as disbursement fees.
  • POC: Similar to the POT, except the stamp duty that costs only RM40.
Quit Rent & Assessment Fees
  • Quit rent: Calculated based on per square foot (psf) of property
  • Assessment fees: Calculated based on the estimated annual rental value of your property
Maintenance fee & sinking fund (for strata-titled property)
  • Maintenance fee: Based on a shared percentage, which depends on a number of factors relevant to your development
  • Sinking fund: The fee is set at 10% of the total cost of the service fees
Mortgage insurance
The premium depends on the type you choose, whether you want a plan that only takes care of the home loan or one that has an additional cash payout at the end
Utility
Water, electricity/power supply, sewerage, Internet
Renovations
As a rule of thumb, your renovation cost should not exceed more than 6 times your monthly household income

What Comes First? The Loan Or The Property?

It sounds a little like a chicken or egg situation, doesn’t it? Well, you can’t shop for a property not knowing if your loan will be approved, and you can’t apply for a loan until you know the property price.
The answer is: Shop for a loan first (or rather, your finances)! It’s best to know where your limits are, to avoid being heartbroken down the road.
Imagine falling in love with a property that’s priced at RM700,000, and then finding out that the bank will only lend you RM500,000 based on your repayment capability…
You’d need to say bye-bye to the property unless you can fork out RM200,000 for the down payment, or if you have plenty of monetary support from ‘FA-MA’ (father-mother).
Want to find out how much you’ll need to earn annually to afford a RM700,000 property? Here’s a quick example: If you put a down payment of 10%, the loan amount would be RM630,000.
The required gross annual income is RM109,000. This is assuming that you have ZERO monthly debt obligations, and the loan is based on a 30-year loan term, with an interest rate of 3.2%.
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You, too, can use the PropertyGuru Home Loan Eligibility Calculator to estimate your own required gross annual income, so you can understand your financials better.

PropertyGuru Tip

Try to set at least 10% to 20% of your monthly pay as savings, towards the purchase of your first home, and/or for emergencies.

It’s best for you to trim expenses and let go of unimportant wants or unnecessary stuff, such as the latest gadgets. And if a car is not absolutely necessary, use other means of transport to get around.
You see, a new car’s value declines as much as 10% the moment you drive it out of the showroom. Depending on the car make and model, it can depreciate by more than 20% after just one year!
Plus, with more loans attached to your name, the lesser the amount of housing loan the bank will be inclined to approve.

Must Know – Your Debt Service Ratio (DSR)

When banks consider whether “to loan or not to loan” to you, they refer to your Debt Service Ratio (DSR), among other things.
Some banks may accept a DSR as high as 80%, while others may only allow 50%. Thus, it is crucial for you to learn how to calculate your DSR before applying for a property loan.

PropertyGuru Tip

A low DSR is attractive to a bank as it indicates that you will be able to pay your monthly instalments on time, and there is a lower risk of you defaulting.

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Apart from your income and DSR, another important consideration is the Loan-To-Value (LTV) ratio. The LTV ratio for a homebuyer’s first property is about 90%.
If it is a third property purchase though, then the LTV is capped at a maximum of 70% (which means that you have to cover 30% of the nett selling price yourself).

Financing Your Property With Home Loans

Once you know that you’re eligible for a loan, then it’s time for you to choose one! The 3 key types of home loans are term loan, semi-flexi loan, and flexi loan.
Some mortgages have lock-in periods ranging from 1 to 5 years, starting from the day the bank issues the first loan payment on the loan agreement, so be sure to check with your banker to avoid any potential shocks!

PropertyGuru Tip

Did you know: If you settle your loan or refinance within that period, you’ll likely be charged a penalty fee, which is typically between 2% and 5% of the outstanding loan amount?

You’d also need to take note of market movements, as government policy changes can also have a direct impact on the overall amount that you end up repaying.
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For example, on 7th July 2020, Bank Negara Malaysia (BNM) announced an Overnight Policy Rate (OPR) cut by 25bps to 1.75%, the lowest level on record. Now, why is this important?
You see, when the OPR goes down, the interest rates on loans goes down as well. A reduction in OPR thus benefits loans that are on a variable rate.
This is because those rates are often pegged against the Base Rate (BR) and Base Lending Rate (BLR) that are recommended by BNM.
Banks have limits on the amount they can lend you (which is generally based on your income level). As a rule of thumb, banks usually loan up to 30% of your gross annual income.
Thus, a joint loan could be an option, as combining two incomes can increase the total amount you can borrow.
However, be aware that you’ll be joined-at-the-hips financially. If the joint borrower cannot pay for his/her part, you’ll have to cover for his/her part of the monthly repayment and risk having a non-performing loan (NPL) if you aren’t able to cover the entire amount month after month.
It may also lead to the property being auctioned off by the bank to recover the amount owed. Apart from that, other complications that could arise from a joint-loan is when one of you wants to sell and the other doesn’t, or if the friendship or relationship has gone sour.

Is It A Must To Have Mortgage Insurance?

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This is an extension of the home loan. Most home loans come with Mortgage Reducing Term Assurance (MRTA) or Mortgage Level Term Assurance (MLTA).
Both are not compulsory in Malaysia, but it is usually mandatory in the terms and conditions of a home loan provider.
MLTA offers greater protection as the amount insured remains the same throughout the life of the loan, even though the amount that you owe the bank will decrease over the years.
In comparison, the amount insured under MRTA declines each year and will reach zero at the end of 30 years. Which one is better? Well, that would depend on your situation.
If you don’t have many dependants relying on you financially, then you could consider MRTA.
However, if you have a family and you’re supporting them financially, MLTA could be a more ideal due to the consistent and higher insurance payout. MLTA is often regarded as a form of life insurance.
budgeting for home, budgeting home
Apart from MRTA and MLTA, there’s MRTT and MLTT (both Takaful insurance products) as well. These 4 types are essentially designed to cover the financial burden of your home loan in the event of death and/or total permanent disability.

PropertyGuru Tip

In the event of death, the property that has insurance attached to the loan will follow the terms of the insurance policy. If there’s no insurance attached to the loan, the outstanding amount will be paid using the estate of the deceased, and the outstanding loan shall be borne by the beneficiaries. This is assuming that the deceased had a will written up.

If you are planning to pay off your mortgage within a few years, then an MRTA or MLTA may not be necessary.
However, if you are planning to service it for the next 30 years, and especially if you are co-purchasing with someone else, it will be best to protect your interest.
The premium is subject to your age, loan amount, and loan tenure. The older you are and the higher the loan amount, the higher the premium.
If you aren’t able to pay the premium, you can opt to finance the premium into the loan. However, this means that your monthly repayment will increase.
Be sure to understand the differences between MRTA, MLTA, MRTT and MLTT, so that you stay protected in the event of an unforeseen circumstance.

Should You Hire A Property Agent?

If you don’t have the time, skills, or patience to do all the legwork, then that’s a good enough reason to hire a real estate agent!
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In addition to that, there are many behind-the-scenes information that buyers may not be aware of. A real estate agent (REA) or real estate negotiator (REN) brings value through their market knowledge, and negotiation skills.
They might be able to anticipate problems and delays, and resolve them on a buyer’s behalf. As to who pays the property agent, generally it’s the seller who pays the commission.
Effective 1 September 2018, under Group A, First Schedule of the Service Tax Regulations 2018, the provision of accommodation under prescribed circumstances is subject to the service tax.
So, SST is chargeable for services rendered by real estate agencies with a SST number. This means 6% SST is applied on the commission.
A booking fee for a new project is subject to SST, if the booking fee is part of the payment to the total purchase price.
This is according to the Royal Malaysian Customs Department. However, if it is not part of the payment of the full purchase price, then it is not subject to SST.
Hence, it’s always a good idea to check with the developer or your property agent whether booking fees is part of the total purchase price.

PropertyGuru Tip

According to the Malaysian Institute of Estate Agents (MIEA), the commission charged for the sale and/or purchase of land/buildings within Malaysia is set at a maximum of 3% of the property’s sale price. You can also check whether the agent you’re dealing with is the real deal.

Agent Finder

Connect with pros who can help meet your needs.

Intend To Purchase A Property? It Starts With An Earnest Deposit!

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In the previous steps, the only cost involved is your time. Once you’ve settled on the unit that suits your criteria, then the costs start snowballing.
The first one is the earnest deposit, which is paid as part of a Letter of Offer. Once that has been paid, you’ve locked in your interest, and the owner is no longer allowed to sell to another party for the duration of the agreement.
Bear in mind that the earnest deposit (usually 2% of the agreed purchase price) counts towards the overall 10% down payment made on a property.
If you drop out of the sale, the amount is usually forfeited. You can have your agent negotiate or include the term for a refund of the earnest deposit based on the condition of the bank loan’s approval.
So, if you aren’t able to get a loan to purchase the property, the earnest deposit is returned to you. The terms of this agreement often stipulate that the 2% payment cannot be refunded in the event that an agreed deal is not completed.
Typically, the duration of a ‘lock-in’ period is 14 days, in which time you need to secure that home loan.

PropertyGuru Tip

It’s crucial that you pay the earnest deposit to an official third-party such as the agency which the agent represents. They’ll hold that deposit as a stakeholder and proof of your interest. Be sure to have copies of all the paperwork. A proper financial trail can prove that money has transferred hands.

Getting The Down Payment, And It’s Time To Lawyer Up!

It is advisable to hire a lawyer to draft the Sale and Purchase Agreement (SPA) and loan agreement. While both the seller and buyer can use the same lawyer, it is advisable to keep it separate.
That way, you can be rest assured that the lawyer you hire will be on your side and have only your best interests at heart.
If you are a foreigner buying properties in Malaysia, do be aware that there are extra regulations and documents to provide.
The minimum down payment amount on a property purchase is 10% of the transaction price. This excludes the promotions or rebates that developers often offer to purchasers, which could mean paying less than 10% to secure a unit.
The Letter of Offer usually includes the timeframe in which you must complete your SPA. Upon signing the SPA, the required balance must be made.

PropertyGuru Tip

Saving for the down payment is challenging, particularly for first-time homebuyers. But, there are several down payment schemes available to help with that, so make sure you check them out!

Be Aware Of The Two ‘Perfections’!

There’s more than just the down payment to prepare for. Be sure to keep track of the progress, so that you won’t be penalised for any late payment charges, which is 3 months after the SPA date.
budgeting for home, budgeting home
If you’re purchasing a property that does not have an Individual or Strata Title issued to it BEFORE the sale, there’s the Perfection of Transfer. It transfers ownership from the developer or previous owner to the new owner.
The Perfection of Charge is required for when a home loan has been used to finance a property purchase. It transfers ownership from the new owner to the bank who financed the loan.

Quit Rent, Parcel Rent, And Assessment Rates

Quit Rent and Assessment Rates are payments that form part of Malaysia’s land tax system. Property owners are legally liable for these charges under Malaysia’s established system of law.
Quit Rent, also known as ‘cukai tanah’, is paid once a year to the Land Office or Pejabat Tanah. A statement is sent to owners, and it is calculated based on a property’s market value. The amount of quit rent a home owner is required to pay varies from state to state.
budgeting for home, budgeting home
Homeowners are also required to pay an assessment tax, also known as ‘cukai pintu’. This is imposed by local authorities to finance the construction and maintenance of public infrastructure, cleaning services, and upgrading works, for areas under its jurisdiction.
The tax is calculated as a percentage of annual rental value, and multiplied by a set of rates as determined by local authorities. It varies according to property type and location, and is charged twice a year.
For strata properties, the quit rent used to be charged to the joint management body (JMB), who then passes on the costs through maintenance fees.
However, in June 2018, a new land tax was created for strata properties in Selangor to replace the quit rent, called parcel rent.
This new parcel rent is now a separate charge billed directly to owners. Penang also implemented the parcel rent system in 2019, and Kuala Lumpur implemented it beginning 1 January 2020.

PropertyGuru Tip

For those who purchase a strata-titled property, do bear in mind the monthly sinking fund and maintenance fees which is to be made to the management office of your property. The former is like a shared pot of money to pay for repairs or upgrading works, while the latter is for ongoing, regular costs like gardening and keeping the place clean.

Sort Out All The Utilities Your Property Needs

Upon receiving the keys to the home you’re going to live in, there are utilities to be taken care of. We’re referring to the 2 things we can’t live without – electricity and water.
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To open your account with service providers, there will generally be forms to fill, a deposit required, and payment needed for miscellaneous fees to cover installation, administrative processing, and stamp duty.
For water, you may have to pay a fee for connection when a water meter is required. If there’s already a meter at your property, you can just transfer it over to your own name.
For electricity, there are three main suppliers in Malaysia – Tenaga Nasional Berhad (TNB), Sabah Electricity, and Sarawak Energy.
If you’re buying a new development unit, then electricity supply infrastructure should already be installed. This comes as part of the required Notice of Vacant Possession.
There is a deposit to consider for new accounts, and it depends on the type of property, and expected voltage level of connection.
A deposit is based on the assumption of 2 months of a customer’s electricity usage, and ranges from RM170 for a simple ‘kampung’ house or flat, to RM1,600 for a penthouse or multi-storey bungalow.
This deposit is refunded when a customer closes the account, and all payments are up to date.
Another cost to take into account of is sewerage. Indah Water Konsortium (IWK) acts as a centralised organisation for sewerage services through most of Malaysia.
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The sewerage systems in Sabah, and Sarawak are operated by local authorities. If you live in a large new development, sewerage connections should be installed as standard.
Premises connected to the public sewage treatment plant are billed RM48 once every 6 months, or RM8 per month.
If your sub-sale property is already connected to the IWK system, you’ll need to apply for a change of ownership.
Last but not least, Internet or broadband connectivity! Contact your preferred provider, but before that, check the coverage for the area.

PropertyGuru Tip

If you’re renting out a unit, you can change the account holder’s name to your tenant by applying for a Change of Tenancy. For TNB customers, you can apply online via the myTNB portal, or at the nearest Kedai Tenaga.

And while we’re on the topic of utilities, don’t forget to consider house insurance in case of anything untoward (like a short circuit), where a basic fire policy is the simplest cover for your home.
If the property is still under a master’s title, the developer or maintenance office will usually purchase a master fire insurance and divide equally to all units.
If the property is under an individual title, you can shop around and get the fire insurance yourself, or a bank could get it for you.
The cost of the fire insurance will depend on the property’s value. Apart from that, you could also consider houseowner or householder insurance.

Renovation And Repairs – Spruce Up Wisely!

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When you get to this stage, you’d have already spent quite a bit. So, how much more can you afford to spruce it up to your liking?
This is where you need to determine what you really need, and what your priorities are. As a rule of thumb, your renovation cost should not exceed more than 6 times your monthly household income.
This means that if your monthly household income is RM10,000 per month, then the total allocated for renovations shouldn’t exceed RM60,000.
If you’re thinking of a major renovation, then that RM60,000 might not be able to do much. Some experts recommend not spending more than 10% of your property’s value on renovations.
So you’d need to decide what’s more important now, and perhaps have another renovation years later when you have saved up more for it.
However, that also means the hassle of cleaning up a lived-in home after the renovation. Remember, always get a quotation from the contractor or supplier before confirming renovation works.
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If you are buying a sub-sale property with furniture included, make sure that you like most, if not all, the furniture. Otherwise, it can cost you quite a bit to hire a lorry or the movers to cart away the unwanted items.
A fresh coat of paint will instantly give your home a fresh and new look, especially important for older houses. The cost would depend on the size of your home.
For a 1,000 sq ft condo unit, it could cost RM5,000 upwards for a layer of undercoat paint and a layer of gloss paint for doors and grille. Alternatively, you could do-it-yourself!

PropertyGuru Tip

You may use the Account 2 in your EPF to purchase or build your first home, reduce or redeem the house loan, or assist spouse to reduce or redeem his/her housing loan. However, you CANNOT withdraw Account 2 for a house renovation. If you’re purchasing from a developer and they provide cashback, then you could use it for renovations.

The 3-3-5 Guideline For New Property Purchasers

If you’re just starting out on your property purchase or investment journey, it might be best to focus on affordable properties that fulfil your essential needs, even if it means settling for something smaller. You can always upgrade when your earning power grows over time.
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The 3-3-5 rule is a guideline for new buyers to take into consideration before purchasing their first property.
3 – You should have a capital of at least 30% of the property’s asking price.
3 – You should not spend more than ⅓ of your monthly wages on your monthly mortgage repayment.
5 – The price of the property should not be more than 5 times your annual income.
Remember: Your income isn’t the only factor that impacts your home loan application. Your spending habits and outstanding debts affect your credit score.
The score is listed in the Central Credit Reference Information System (CCRIS) report. CCRIS is a system created by Bank Negara Malaysia (BNM) to provide standardised credit reports on a potential loan borrower.

Phew! Are You Ready For All The Costs Involved?

Overall, purchasing a property in Malaysia doesn’t just start and end with the down payment. There are plenty of other equally important factors which you’d need to take into consideration when doing the budgeting.
Once you’re aware of all the costs mentioned above though, then you wouldn’t be caught unaware and end up burning a hole through your bank account (or worse, end up having your home seized by the bank!).
Relevant Guides:
Disclaimer: The information is provided for general information only. PropertyGuru International (Malaysia) Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.