So I visited a showroom the other day to “dream shop” a house. But then. I thought…
“It’s 2020, I’m reaching 30 soon, the Malaysian government just announced lowest OPR in 15 years and I’m quitting my full-time job to embark on entrepreneurship once again. Also, there’s zero down-payment, and I’ll get cashback some more! It’s all meant to be, I MUST buy a house now!”
Then I had trouble sleeping for 2 weeks, couldn’t decide whether I should or shouldn’t buy the house. I’m worried, of course. Buying a house is a HUGE decision and a LONG-TERM commitment. It has gotten people into financial trouble because they did not prepare well. So please, by all means, get yourselves ready and prepared to purchase a house and read on!
In this post, I’m sharing the points and methods I used to consider my house purchasing decision.
How do I know if I’m ready to buy a house?
The 3 main advice that I got from my mentor, friends, agents and from reading articles:
- Earning enough monthly income to afford the house.
- Having 12 months of instalment buffer on top of an emergency fund.
- Know your purpose of purchase
Instalment within 20-30% of Net Income
The first thing to consider is the monthly instalment. You have to commit to this house for the long term. Don’t ever think that you can easily sell your house if things go wrong, selling a house takes time, sometimes a few years.
Some banks and real estate agent may be able to help you get a loan at 90% Debt Service Ratio (DSR), means that all your loans – home loan, ASB loan, car loan or credit card instalments equal to 90% of your net income. However, it’s not the best option to go for. How can you even live AND SAVE with only 10% of your remaining income?
A home mortgage is ideally 20% of your net income, but if you’re sharing with your spouse, experts say 30% of household income is okay. You can check your loan and monthly instalment affordability here. Or calculate as below:
It’s important to consider other monthly expenses that come along with a house purchase such as maintenance fee, sinking fund and bills! This is especially important if you’re planning to purchase an apartment or condo, because an apartment on commercial land may get bills charged on the commercial rate.
Another important thing to consider is the fluctuation of the OPR. Even though it might be low currently, the total interest rate could potentially increase above 10% 20 years down the road, as it was 25 years before. So, even though the current ideal monthly instalment is at 20%-30%, the lower the better. More money to spend elsewhere anyway, right?
Now, my main concern about this part is that we’d never know how much money we can consistently make every month, for the next 35 years. Of course, it’s everyone’s dream to make more and more money as we get older. But what if one day, we get retrenched, or our business is on a downward curve? Well, the next tip will answer.
12 Months Installment Buffer
This advice was given by my financial coach, Dr Niki Shuhada. So a buffer is basically an emergency fund to reduce shock if your source of income ever get disrupted. So if anything were to happen to you, like this Covid-19 situation and you lost your job, you will be able to pay for your loan, lessen the burden so you’d be able to focus on finding the solution to make more income. So as a rule-of-thumb. If you have the buffer, you can afford the property.
Purpose of Purchase
Now, this is an important one. If you’re planning to buy a house for investment, there are tonnes of things to consider – rental yield, capital growth, location, inflation, future development, and etc. Buying an apartment or condo for future investment can be a huge risk because, a) Developer sells unit at a future value and b) In the future, the building design and services may become obsolete unless the maintenance is really good. A landed house could also decrease in value if shitty development happens. So, unless you really have huge cash flow and a big risk appetite, do not jump into it.
If you’re buying a house to stay for the long term, i say go with whatever house you’d like in whatever town you’d love to live in. As long as rule 1 and 2 is checked, you’re all set!
To Buy or to Rent?
If you don’t have a strong reason to buy a house, renting one would be a cheaper alternative, as my calculations below:
As above, both renter and homeowner may face a price increase. But for a renter, it’s more flexible to move out and downsize, although finding a good rental on short notice is not that simple and there are moving costs like hiring lorry and helpers. If you’re still exploring opportunities and live minimally, renting is much simpler. Plus you can use the extra money for investments to grow your cash like ASB financing instead.
If you already fell in love with a town and really want to settle down, buying a house would be a good choice as you can decorate and renovate the house as much as you like and not worry about getting kicked out of the house a few years down the road. If you really choose a good location, when your house value increases in the future, you will be able to reap the profit in so many ways.
So, who here is buying a house? What do you think of these tips?