Published by:

Agensi Kaunseling dan Pengurusan Kredit Aras 8, Maju Junction Mall 1001, Jalan Sultan Ismail 50250 Kuala Lumpur Fax : 03-2616 7601 E-mail: enquiry@akpk.org.my AKPK First Edition 2011 The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.

ISBN 978-983-44004-2-2

Disclaimer: The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor. Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action. While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission. The names and details of individuals in the real life cases have been changed to protect their identities.

Chapter

BUying a hOUsE

Buying a house is an exciting event, especially if it is your first home. A house may probably be the biggest purchase you will make and perhaps one of the most crucial financial decision you will make as an adult. To finance the purchase of a house, you will need to first source for a housing loan. Understanding the steps involved in securing a housing loan will help you save time, avoid uncertainties and reduce unnecessary stress. This chapter will provide you with insights on various issues with regards to buying and financing the purchase of a house.

tO BUy OR REnt?
Owning your own home gives you a sense of pride, accomplishment and security of having a permanent roof over your head. When you buy a house, you get to increase your net worth as you pay down the loan. Each monthly payment you make reduces the outstanding and increases the equity on your house. Paying down your mortgage will also allow you to refinance your house if you have a need for it in the future. Refinancing should only be considered if you have sufficient equity on your house, a good purpose and a need for the additional loan.

74

While rental rates can increase from year to year, the principal on your mortgage goes down with each payment you make. In addition, as the housing market grows, the value of your house appreciates, particularly if it is in a good location. Although buying a house sounds great, it may not be affordable for everyone. These are some commitments that may come with the purchase of a house: Owning a house may take up a lot of your time as you have to handle repairs and the general upkeep of the house Many small improvements you make to your house can add up to your expenses. If you rent, maintenance expenses are usually covered by the landlord You are in fact tied down to your house, unlike a tenant who has the freedom to move about If you are not happy with your new neighbourhood, you may find yourself stuck until the value of your house appreciates before you can sell it Many things can happen unexpectedly to bring down the value of your house. For instance, the area may be prone to floods or the access to your house may be affected by a new development

75

Renting a house gives you the freedom of movement Owning a house gives you a sense of financial freedom

guide

on when you should rent

When you cannot afford the installments or down payment When you expect the property market to soften When you are scouting for a suitable location to buy a house When you do not want to worry about maintenance and repair costs

76

BUying FOR inVEstMEnt

Investing in property can be a powerful wealth-building tool. This is especially true if you are considering becoming a landlord through a house purchase. Here are some questions to consider when buying a house for investment: What type of property will increase my financial worth? How much rental income can I expect from my property? Will I be able to handle long-term ownership and maintenance of the property, even if my cash flow is not consistent (especially when my property is not tenanted)? As properties are not liquid and cannot be sold quickly, will this be a problem for me when there is a need for cash?

Are you willing to deal with the responsibilities of being a landlord? It is not an easy task. You will have to collect rent and there might be instances when the rent is delayed or not paid. You may not be happy with your tenant and may have to evict them. Furthermore, there will be repair works, tenancy agreements, income or deductions to be declared and taxes to be paid. Of course, you can engage professionals to take care of these matters for you but that comes with a cost!

77

if you are buying a property and planning on selling it later, keep in mind that you may be subjected to Real Property Gains Tax (RPGT) on the gains from the sale of your property When purchasing a house either for investment or residential purpose, location should be your main consideration. A good location helps you attract tenants, get the rental income you want and increase the value of your house.

FaCtORs tO COnsiDER
There are two aspects to consider before buying a house. These can be classified as non-financial and financial aspects.

non-financial aspects

location of the property location! location! location!

You need to decide where you would want to live and the kind of neighbourhood that suits your needs. There are many factors that may influence your choice of location. Some of them are: basic amenities like shops, banks, post office, schools, hospitals, recreational parks and the general neighbourhood availability of public transportation proximity to your work place traffic condition security

78

2 3

Type of property landed or high-rise

The main types of properties are landed and high-rise. Landed properties generally cost more, especially the ones nearer to cities. High-rise condominiums and apartments on the other hand are normally more affordable. Landed properties also tend to appreciate more than high-rise properties When you buy a freehold property, you get to own the property for an indefinite period. A leasehold property on the other hand, lets you own the property only for the lease period, normally up to a period of 99 years. After the lease period is over, the property reverts to the state authority, unless the lease is renewed (which when done, a premium (cost) needs to be paid). Due to this, a freehold property tends to command a higher price over a leasehold property

Type of ownership freehold or leasehold

79

4 5

Availability of title individual or strata

A title proves your ownership over a property. You will be issued an individual title for landed properties, while a strata title will be given for condominiums or apartments. You need to check if there are encumbrances or restrictions in interest on the property you are buying. These restrictions may affect the transferability or saleability of the property. It is best to get a lawyer or someone familiar with this matter to advise you before paying any deposit for the purchase Most developers of a new project adopt a sell-then-build approach. Therefore if you are buying a new house, you will initially not be able to see what you are paying for. Here the track record of the developer becomes important. Assess their previous projects to see if they keep to their promises. Check: if they deliver properties on time the quality of their work if they provide all the amenities as promised in the brochure

reputation of developer

80

reputation of developer (continuation)

if their previous customers were satisfied with their purchase upon receiving their units if a project is abandoned, you are liable for all disbursements made by the bank although you do not get delivery of the house

Note that reputable developers normally charge a premium on their properties

Financial aspects
assess your affordability Assess your cash flow and net worth position to determine your financial standing. These statements serve as your financial scorecards that should be used as a reference when you make money-related decisions. Basically there are two main affordability issues to consider: Down payment and other related costs A good estimate for a down payment on a house would be about 10% to 20% of the purchase price. You would also need to set aside another 5% to 10% for related costs, such as legal fees and stamp duties.
Please refer to Appendix 5.1 for details.

To pay for the above costs, common options are: Personal savings or investments Use your savings or investments to pay for your down payment. A higher down payment lowers your cost of borrowing.
81

EPF savings account You could withdraw from your Account 2 to make the initial down payment to buy a house. Please contact your nearest EPF office to enquire about your withdrawal eligibility. Eligibility for a loan facility Most people would take a loan to finance the balance of their house purchase. Before committing to a loan facility, you need to assess the following: Debt-to-income ratio We talked about debt-to-income ratio earlier. When you want to purchase a house, try to keep all your monthly loan commitments to not more than 40% of your gross monthly income. If you are currently paying for a car loan, you have to assess if your current income can take on another loan. If your car loan, Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) loan and other loans have already hit this limit, then perhaps you may want to delay purchasing a house. Always ensure that you can meet your monthly installments in a timely manner. Take a look at the following illustration: House price Down payment @ 10% Margin of finance @ 90% (Loan amount) Interest rate Loan tenure Monthly installment = RM250,000 = RM25,000 = RM225,000 = 7% p.a. (Fixed) = 25 years = RM1,590

82

Based on the computation, your housing loan installment is RM1,590 per month. To gauge if you can comfortably afford the installment, your debt-to-income ratio should not exceed 40%. This means that your monthly income should be at least RM3,975 (1,590 40%). However, bear in mind that this calculation assumes that you do not have any other loans to pay. If you do, then you would need to assess your total loan commitments. For example, if you are paying RM938 per month for your car installment, then the following calculations apply: Housing loan installment = RM1,590 Car installment = RM938 Total loan commitment = RM1,590 + RM938 = RM2,528 If we take a debt-to-income ratio of 40%: Gross monthly income needed

= RM2,528 40% = RM6,320

Mortgage Reducing term assurance (MRta) This is a one time insurance premium which covers the insured in the event of death or total permanent disability (TPD) for the unpaid portion of the housing loan.

83

Loan-to-value ratio (LtV) LTV ratio is also commonly referred to as the margin of financing. Typically, banks are willing to lend you up to 90% of the purchase price. However, the margin of financing may vary depending on the type of property, the existing loans and repayment capacity of the borrower. The difference between the loan and purchase price is what you need to pay in cash when buying a house. For your investment properties, it is best that you keep the LTV ratio low. This is because, should there be a significant weakening of property prices, you may be required by your financier to either reduce your loan outstanding or provide additional security to maintain the LTV margin set by the financial institutions.

tyPEs OF LOan
After assessing your capacity, check the loan packages that are available in the market that best suits your requirements. Here are some of the different types of loan available: Conventional loan or Islamic financing Fixed or floating rate Term or flexi loan Level or graduated payment

84

It may seem complicated and confusing at first but if you take your time to do your research and know what works best for you, you should be able to find the right package. Most loans are tied to the BLR. Currently, many financial institutions offer loans at attractive rates (below BLR). However, you need to be mindful that most of these rates come with lock-in periods (normally 5 years). If you redeem the loan within this period, you may be subjected to a penalty fee.

BLR is an interest rate calculated by financial institutions based on a formula which takes into account the institutions cost of funds and other administrative costs. Any changes to the BLR will: a) increase or decrease the amount of repayment; and b) extend or shorten the tenure

Browse the website of BNM www.bankinginfo.com.my for further information.

85

Fixed or floating rate?

With a fixed rate loan, the interest remains constant. Thus the installment remains the same over the tenure With a floating rate loan, the interest is pegged to BLR. If the BLR rises, your interest rate will increase and your monthly repayments will be higher. On the other hand, if the BLR decreases you will benefit from paying lower monthly repayments There are also floating interest rate loans with fixed monthly payments where any changes to the interest rate will either increase or decrease the loan tenure

Keep up with your commitment After knowing your capabilities and being able to answer yes to the following questions, you are ready to buy a house: Am I ready for a long term commitment? Can I keep up with the installments? If you are buying for investment, can you continue paying the installments without rental income?

If you are unable to keep up with your housing loan repayments, you can end up losing your house as well as all the monies you have paid for the house. If the bank decides to auction your house, you will be liable for any shortfall arising from the auction.

86

is your pocket deep enough?

Age Occupation : 31 years old : Technician

Marital status : Single Kanesan only had one credit card and a hire purchase facility of RM50,000. He did not live a lavish lifestyle, was prudent with his spending and careful with his credit cards. As the eldest child in his family, he took it upon himself to take care of his parents and siblings, although his salary as a technician was barely enough to pay for the household expenses and his hire purchase commitment. After years of staying in a rented house, his family persuaded him to buy a house of his own. They insisted that through home ownership, he would not lose the monthly installment paid towards the house as he would own the property at the end of the loan tenure. Kanesan was excited with the idea and thought that he could manage the monthly housing loan installments with his overtime and extra allowance. He soon agreed to his familys persuasion and took a loan for RM150,000 to purchase the house.

87

At first, Kanesan was able to comfortably repay the loan, however, the economic crisis brought some financial burden to him. The overtime and extra allowances that he was used to, was no longer available. Due to this, he was unable to service both his hire purchase and housing loan. Kanesan decided that he had to make a choice between servicing the house or car loan due to his financial predicament. As he needed the car for transportation to work, he felt that it was more pressing to service the HP loan. Kanesan soon neglected his housing loan which resulted in the auction of the house by the bank. As the location of the property was not very good, the auction price was only able to cover 70% of the outstanding amount. The shortfall from the auction amounted to RM50,000. The bank then decided to proceed with bankruptcy action as Kanesan was not responding to the demands to repay the loan. Worried about the possibility of losing his job should he be made a bankrupt, he approached AKPK for assistance.

88

takeaways
Buying a house is a major decision. Take your time to think through carefully, look for one that best suits your liking and budget. Do your homework! If you cannot afford to buy just yet or nothing suits your liking, you can always rent first Before you decide to buy a house, know the non-financial and financial factors If you are buying a property for investment, ensure that you are able to pay for the installments even if the property is not rented out

89

Checklist
Have you done a developers background check, if you are buying a house under construction? Do you know the encumbrances and restrictions in interest on the title? Do you have enough money to make the down payment? Can you afford to pay the monthly installments comfortably? Do you know the incidental fees or costs that you have to pay? Is the interest rate fixed or pegged to the BLR? Is there a penalty if you redeem your loan before the tenure expires?

90

sELF assEssMEnt
1. When buying a house, you should _________________ a. b. c. d. 2. check the background of the developer (if buying a house under construction) consider the location of the property, in line with your requirement consider the monthly loan installments and other related costs, in line with your level of affordability all of the above

Generally owning your own home means all of the following, EXCEPT: a. b. c. d. A sense of pride, accomplishment and security Increasing your net worth Unable to rent out the house Pay quit rent and assessment

3.

When you decide to apply for a housing loan, what is the most important factor to be considered? a. b. c. d. Determine your ability to service the monthly installments Ensure that you understand the loan agreement Check your CCRIS Find a suitable location

4.

The following are direct and incidental costs usually incurred during property purchase, EXCEPT: a. b. c. d. Legal fees for Sales and Purchase Agreement Legal fees for bank loan agreement Real Property Gains Tax Stamp duties on S&P and loan agreement
91

5.

Ali took a housing loan at an interest rate pegged to the Base Lending Rate (BLR). Which of the following is TRUE if there is an increase in BLR? a. b. c. d. Banks may increase the monthly installment without extending the tenure No change in installments or duration Banks may decrease the installments without a change in loan tenure Banks may recall the facility if your repayment is insufficient

If you take a housing loan jointly with your spouse and insure the property with MRTA for RM100,000 proportionately, what would happen if your spouse passed away? a. b. c. d. You will receive an insurance sum of RM100,000 The bank will write off 50% of the loan outstanding on compassionate grounds The insurance company will only settle 50% of the loan outstanding The insurance company will settle the full loan outstanding

7.

Besides MRTA, the following are insurance coverages available for your house, EXCEPT: a. b. c. d. Marine policy Homeowners policy House holders policy Fire policy

Check your answers at the end of this book

92