What A First-Time Home Owner Needs To Know About Down Payments

The decision to purchase your very first home is incredibly exciting.

Not just because home ownership is one of the big first steps in life, but because it’s a process that requires much time, effort, research and dedication.

From determining what sort of property is best for you and your long-term goals, the area you want to live in, and what your budget is, there are many factors to consider when you’re a first-time homeowner.

After you’ve figured out what type of property you want to purchase, the neighbourhood that’s right for you, and a home loan amount that matches your income, then comes the next biggest hurdle: understanding how much of a down payment you can afford.

As most people don’t purchase homes by paying the full asking price in cash, knowing what you can afford with your home budget goes hand-in-hand with determining the down payment.

The down payment on a house is the initial payment that’s made towards the purchase price of your home and is a cost that is made out-of-pocket.

This initial instalment is important, and not just because it’s your first payment on your home!

You see, the amount that you pay in this first transaction will affect the home loan amount that you’re eligible to borrow, and then pay back over a stipulated period of time.

For first-time homeowners in Malaysia, lenders are usually able to provide a home loan of up to 90% of the home’s purchase price.

This means that the out-of-pocket down payment would be 10% of the purchase price.

But just because a lender offers a loan of 90% of the home price, it doesn’t mean that you must borrow that much.

If you’re able to afford a larger down payment, go ahead – but whether or not you should is up to you.

If you choose to make a down payment larger than the minimum 10%, this will result in you paying more out-of-pocket and borrowing less from a lender.

This means that though you have to pay a larger sum upfront, you’ll pay less in interest and your monthly repayments will be lower.

This will, in turn, provide you with more monthly cash flow so that you can do more with your money.

Additionally, if you encounter expensive emergencies or if your income changes, your monthly repayments will be lower, giving you more flexibility over how to spend your money.

What’s more, with a larger down payment, you could qualify for a better interest rate from your lender.

This is because paying more in your first instalment means that the lender is taking less risk by providing you with a smaller amount of money, and can therefore give you a lower interest rate.

A larger down payment can also reduce the amount of money you need to cover in your home loan insurance policy.

This is a policy that would cover the payments of your home loan if you’re unable to make the monthly payments due to death or total permanent disability.

Though a home loan insurance policy is not required by Bank Negara Malaysia, some lenders require borrowers to have one in order to provide a home loan, and some homeowners prefer to have a policy for peace of mind.

Whether or not you take out a policy depends on your preferences and your lender.

Additionally, paying more upfront for your home, and thus borrowing less, can reflect positively on you in the event that you need to take out additional loans, such as for a car, another property investment, or a new business.

Lenders evaluate potential borrowers on their debt-to-income ratio (also known as the Debt Service Ratio, or DSR), so the lower your other monthly expenses, the better your chances are at securing a loan!

IMPORTANT: Note that in Malaysia you can receive up to 90% financing for your first and second property, though if you purchase a third, the financing availability dips to 70%.

So, that means you gotta be ready to fork out a whopping 30% down payment for that third property… are you sure you can handle that?

Finally, making a larger down payment can also make you eligible for a home equity loan, which is when a borrower uses the amount of money they’ve invested in their home loan as collateral for the loan.

If you’ve paid more and borrowed less, the equity you’ve accumulated in your home will likely be higher, giving you access to more cash.

Making a small down payment is a compelling decision simply because it allows you to pay less upfront.

You’re able to become a homeowner faster with a 10% down payment than with a higher down payment – which could take yearssss to save up enough cash for, depending on your other monthly expenses and income.

Even if you have enough money saved to make a larger down payment, spending most – if not all – of it on one purchase can be a scary decision!

Parting with that money would deplete your savings and leave you with little for any unexpected expenses that may crop up, leaving you feeling uneasy about your financial situation.

Plus, making a smaller down payment can mean that you have more money for such considerations as home renovations, any legal fees, and your real estate agent’s commission.

Or you could be saving up for momentous milestones such as starting a family, investing via other avenues, or planning for retirement.

And don’t fret about stamp duty – the cost of it is waived for first-time homebuyers purchasing properties under RM500,000 between 1 January 2019 and 31 December 2020.

Once you’ve determined your budget for purchasing a home and the amount you can spend on a down payment, you’ll be prepared to chat with banks, lenders and government bodies about the home loan option that’s best for you.

After this important step, you’ll be prepared to secure your preferred home loan financing option, and that much closer to purchasing your first home.