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
2% of the agreed purchase price
10% of the agreed purchase price (total including earnest deposit)
Sale and Purchase Agreement (SPA)
Legal fees, stamp duty, and legal disbursement fees
Legal fees, stamp duty, and legal disbursement fees
Real estate agent’s commission
Maximum of 3% of the property’s sale price
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
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
Water, electricity/power supply, sewerage, Internet
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.
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!
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.
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.
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.
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!
Intend To Purchase A Property? It Starts With An Earnest Deposit!
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.
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.
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.
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.
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.
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 Ratesare 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.
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.
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.
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.
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.
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.
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.
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!
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 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.
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!
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.
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.
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!).
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