Wanting to purchase your first property can be as easy as 1-2-3… as long as you’re able to overcome the first (and largest) roadblock: the down payment!
Now, the minimum amount that’s generally forked out for a down payment is 10% of the property’s price, and you’d probably be thinking how long that’s going to take you to save up.
Well, that’s all depending on a couple of key factors:
- What’s your monthly salary like
- How much you’re able to set aside each month
- The price of the property you’ve set your sights on
- How soon you want to move
While there are some who may want to go for a 0% down payment plan, many experts are of the agreement that if you’re able to pay more for the down payment, the less your mortgage loan will cost.
The reason for this is because you’ll end up paying less for the interest rate that’s charged on your loan. Let’s take a look at a quick example:
So, let’s say you’re planning on purchasing a property with a price tag of RM300,000.
If you allocate a down payment of RM30,000 (10% of the property’s price), and apply for a home loan with an interest rate of 4% and a tenure of 35 years, that would compute to roughly RM1,196 in monthly instalments based on the home loan amount of RM270,000.
What’s interesting to note is the part on the calculator which says, “Total Payments” and “Total Interest Payments”. Did you notice those? You’d better, they’re very important!
You see, for the Total Payments, it’s an amount of RM502,107 (RM270,000 + interest of 4% for 35 years) while the Total Interest Payments shows an amount of RM232,107.
What these essentially mean: you’ll be paying the bank an additional RM232,107 just for the interest rate because they were kind enough to lend you the money you needed to get your dream home!
In the end, that property you purchased doesn’t really come with a price tag of RM300,000… it’s actually RM502,107 (thanks to that interest rate)!
What happens if you took the same example, but this time without forking out for that 10% down payment? You’d better be ready for quite the unpleasant surprise.
Assuming every other factor remains the same, applying for a home loan of RM300,000 will result in you paying more in monthly instalments (RM1,328 to be exact), and more in total interest payments as well (RM257,896).
That’s a whopping extra of RM25,789 compared to applying for a RM270,000 loan! And the total payments? RM557,896.
Time to save up for a down payment then
Since you now have a rough idea on how important a down payment is in ensuring you don’t have an overpriced asset on your hands, let’s take a look at how long it would take you to save up for that 10%.
We’ll be using the same example as given earlier (above): dream home worth RM300,000, a down payment of RM30,000, and monthly instalment of RM1,196.
Assuming you earn RM3,000 nett (after the mandatory tax, EPF, and SOCSO deductions) a month, after deducting the instalment, you’ve now got RM1,804 left.
Now, assuming you decide to save RM300 every month from that leftover amount to put towards a down payment of RM30,000, it’ll take you 100 months to reach that goal. 100 months = 8.3 years!
If you got a shock, it’s the unfortunate truth. According to the Salaries and Wages Survey Report Malaysia 2018 by the Department of Statistics Malaysia (DOSM), the average salary for employees stands at RM3,087.
For someone who’s living on their own, they’ll have to worry about a myriad of other costs like rent, food, transportation, phone bill, and savings for an emergency.
That’s why banks would always want to check on an individual’s Debt Service Ratio (DSR) before they can be approved for a home loan.
This DSR formula which will show if you’re able to repay your loan, or if you’ll be barely surviving each month. The calculation goes like this:
5 ways to help you save for a down payment
A 10% down payment is a considerably large amount of cash, and can seem almost impossible to reach for many Malaysians. It’s one of the reasons why people usually take yearsss to save up every single Ringgit they can.
If you want to do the same too, here are some tips and advice for you to get started on your homebuying journey:
1) Plan and know how much you need
Research, research, and RESEARCH on all the localities in order to find the one you most prefer. From there, you can then get the average prices of homes in the neighbourhood, and calculate the down payment required.
After that, it’s all down to your discipline, commitment, and patience! Avoid unnecessary expenses (is that third cup of bubble tea really necessary?) or taking on more commitments, like a loan for a brand new car.
Time is crucial here, so make do with methods such as using public transportation and eating economical meals. Better yet, you can meal prep at home and save more money in the long run!
2) Don’t ignore the other costs involved
Did you know that the down payment isn’t the only cost you’d need to be worried about? There are other costs that go towards home ownership, i.e. legal fees, stamp duty fees, and land tax to name a few.
Healthy cost-cutting habits will help here as well, if you don’t want to be faced with the sudden shock of not having enough money in the end to cover these miscellaneous costs.
3) Get your home loan pre-approved
What this means is that you basically get a pre-approval letter from banks to help you check on how much of a home loan you can get approved for, before you "officially" apply to them.
The pre-approval letter is a document that states that the bank has agreed, in principle, to lend you a specific amount of money for the purchase of your home.
All you need to do is complete a home loan application and the bank will verify the information you provide and you’ll receive the pre-approval letter if you’re pre-approved.
4) Increase your monthly salary
Sometimes, just saving up a bit each month may not be enough. Start considering other ways to increase the amount you bring home, simply because more income = more savings.
Apart from asking your boss for a raise, you could also consider investing your money, or using your skills/talents for freelancing job opportunities (over the weekend, of course!).
You could also generate some side income by taking part in the thriving online community, and opening up a small business that allows you to sell homemade goods.
5) Safeguard your down payment fund
If you’ve already been following the pointers above and have been able to put aside quite a healthy amount of money towards your down payment, good for you!
However, what if one day you were to meet with an unfortunate road accident that leaves you hospitalised, and in need of emergency cash?
It’s a fact that we won’t be able to predict the future, nor be fully prepared for it, but what we can do is safeguard our finances.
Make sure you have a separate savings fund which you can dip into for emergencies, so you don’t need to touch that precious down payment.
In addition, you could also sign up for a health insurance plan that comes with an accident cover, as that will definitely be a life-saver (literally) when it comes to anything medically-related.