Buying a house and having it registered under your name can be exciting and fulfilling. For many, it is a symbol that you are taking the next big milestone in life – having a home to your name, taking the leaping from renting to buying.
As with any milestone, it can be a life-changing decision, both for your lifestyle and your finances.
Buying a home is a long-term commitment that requires strong mental fortitude and healthy financial standings. Having good saving habits is a strong start but to be a homeowner, you need to know what you want and be ready for unexpected breakdowns.
Below is my take on what it means to be ready for homeownership and the expectation you should have as you sign the dotted lines.
1. You have minimum debt and financial commitments
When we talk about debt, it is important to understand that debt falls into 2 categories,
- Debt or borrowed money used to purchase assets that will grow your wealth
Also known as leveraged borrowing to help you buy investment assets that experiences capital gain more than the interest charged. Mortgage loans is a common form of debt, helping common folks like myself grow our investment portfolio or businesses. - Debt or borrowed money used to buy into liabilities for personal need or self gratification
To help you understand, this is the form of borrowing where money is used to finance your high cost lifestyle or the fancy car you drive to impress. This form of spending does not help in building your wealth and is detrimental as it leads you further into debt.
While I am not here to criticises any financial habits or decisions, I recommend that you minimize your debt level if you are looking forward to purchasing a house in the near future.
Here in Malaysia, a profile with a combined debt (including the amount borrowed) higher than 60% of the gross income will be deemed unfavourable. The individual’s debt-service ratio is high and is considered to be a high-risk defaulter. The chance of getting a mortgage loan is significantly lower.
If you currently have a high level of debt, do not panic. This is not the end of the journey, merely the beginning of your homeownership adventure.
Let me attempt to help you prioritize which debts you should seek to clear off quickly so that you can be ready to buy your own house soon.
These are the debts I believe you should prioritize, ranked in order from top priority to the least priority,
- Credit card debt
Credit card debt is the worst because it is easy to lose track of your spending on a monthly basis. On top of that, banks charge an average 18% annual interest which can quickly snowball a $10,000 debt into $22,000 in 5 years (the debt doubled in 5 years – way faster than any investment vehicles in the market). - Hire purchase or personal loan
If you are just starting out in life, perhaps the last thing you should be buying is a fancy car to impress your peers. If you can reduce your hire purchase debt as much as you can, that will help you to improve your budget when it comes to buying a house. - Education debt
It depends on which institution you have an education loan with. From what I understand, the typical interest rate for education loan tend to be pretty low and it does not compound quickly. However, this education loan will show up in your CCRIS/CTOS record and it does affect how much you can borrow from the bank when applying for a mortgage loan.
There are other schools of thought on how you should prioritize clearing off your debt effectively.
Personally, I aim to clear off the highest interest debt as quickly as possible, saving myself the interest charges. This strategy might not work for you, so I decided to include this link on clearing off debt effectively, which will be helpful to you as you learn to manage your debts better.
2. You have consistently contributed to a savings account
If you have never consciously contributed to a savings account, you might want to put off the idea of purchasing a house for now.
The action of saving every month is important to build a financial habit where you are comfortable putting away a cut of your monthly income for other purposes. In this case, into a mortgage payment every month.
To get you started, you want to be able to set aside at least 10% of your monthly income into a savings account. If you are saving money every month, it indicates to the bank that your cash flow is in good shape. This also signals to the bank that you practise good financial habits and can afford a mortgage.
Besides that, if you want to be truly ready for homeownership, my recommendation is to first increase your monthly savings rate from 10% to at least 35%.
Statistically, the typical mortgage monthly payment is around 30% of an individual’s income. With that said, I recommend you to consider purchasing a home only when you are able to set aside savings higher than the 30% mentioned earlier.
This is important to prevent yourself from stretching your monthly cash flow too thin. At the same time, preparing ahead in case of any financial emergencies.
To put it simply,
If you do not have the habit of setting aside money for savings, you are not mentally ready to set aside monthly mortgage payments. Buying a house is a financial commitment and defaulting on mortgage loans have repercussions and risk of bankruptcy.
3. You can afford a 10% down payment for the house
You are ready to buy a house if you can afford a 10% down payment after setting aside emergency funds. It shows that you are earning a stable income every month and financially ready to walk the homeownership path.
In reality, you do not always need to put a 10% down payment for the house. If you are buying a new project that is currently under construction, you may not need to fork up the 10% down payment due to rebates from property developers.
However, not having a saved amount specifically catered for a 10% down payment will limit your choices when shopping for a house. In my experience, most decent house with great investment potential will typically require their buyers to put a down payment; ranging from a 2% down payment to possibly a 10% down payment.
Besides that, having more money saved aside for a down payment can work out well on your mortgage loan. The more money you pay upfront as a down payment, the more interest charge you will save in the long term.
As a simple benchmark for interest charged on mortgage loans, for every $100,000 borrowed, you would have paid an additional $80,000 as interest at the end of a 35-year tenure.
4. You have a healthy credit score
Your credit score is a reflection of your payment habits. A healthy credit score tells the bank you are a responsible paymaster who pays off their bills in a timely manner, identifying you as a low-risk borrower. This subsequently improves the likelihood of banks approving your mortgage applications.
To put it simply, if you have a terrible credit score, the hopes of buying a house is going to be challenging. Because you are deemed as a high-risk borrower (who do not pay on time), most banks will choose not to entertain your mortgage application.
In contrast, individuals with healthy credit score enjoys a number of benefits,
- Higher mortgage loan approval chances
A healthy credit score indicates good payment habits. Banks will be delighted to offer their business to you if you have a healthy credit score. - Lower interest rates
The banks today do take into consideration of your credit score when offering a suitable interest rate on your mortgage loan. Having a higher credit score means you get to enjoy lower interest rate. Subsequently, that also means less money paid to the bank as interest over the long term. - Better negotiation power
With a healthy credit score, you are welcomed to do business with multiple banks of your preference. This puts you in a position to negotiate better interest rate and mortgage loan terms with bankers who wishes to have your business.
If you are in a situation with a poor credit score, fret not. There are simple steps to build up your credit score over time.
- Pay your bills on time
The whole point of the government introducing a credit score is to understand your payment habits. Hence, the most logical thing you can do to improve your credit score is to start paying your bills on time. - Get a credit card and pay it on time
The credit card is a wonderful tool to build credit score because of the attention credit card payment receives from banks and government. After obtaining your credit card, always remember to clear off any credit borrowed before the due date. Over time, this will build up your credit score. - Do not max out on your credit card
Maxing out on your credit card indicates to the bank you are a high spender. This puts you on a disadvantage during a mortgage application as banks take into consideration your lifestyle in their debt-service ratio calculation. Ideally, you do not want to utilize more than 40% of your credit limit.
5. You have a stable income
Your monthly income is the first consideration any bank will look at when it comes to mortgage loan applications. Banks are highly optimistic about individuals with stable employment and a steady stream of monthly income as it gives them assurance on their monthly payments.
Simply put, banks consider individuals with steady monthly income received through permanent employment as low-risk borrowers. In contrast, individuals earning on commission without stable monthly income is considered to be a high-risk borrower.
Besides the steady stream of monthly income, banks also consider the type of employment you have. Permanents employees who have a role with reputable companies or the government tend to fare better in getting their mortgage applications approved; only needing to prove the last 3 months of income.
On the other hand, freelancer artists or sales representatives earning on commission are required to prove 6 months of income. In some cases, these individuals may be required to prove up to 2 years of income before banks are willing to consider their loan applications.
6. You can afford to direct 30% of your income into monthly payments
As a general rule, new homebuyers are advised to make sure the total monthly payment does not exceed 30% of your monthly income. Borrowing more money can be detrimental to your monthly savings, leaving you vulnerable with little to no emergency funds.
Ideally, you want to be able to save up some money every month after paying off your mortgage payments. This gives you room to consider other investment opportunities or even to take the family away for a good vacation.
If you are unable to save some money after paying off your mortgage payments, personally, I’d advise you to reconsider purchasing the house. Take some years to build up your savings and focus on growing your income stream. Once you are ready, you will find that there are significantly more opportunities to consider when you have sufficient funds set aside.
Please do not succumb to the fear of missing out (FOMO).
Buying a house or real estate investment is meant for financial liberation. The last thing I want for my friends is to be financially trapped because of a house and poor financial decisions.
7. You know what you want and can afford
Nothing speaks more to me than an individual who knows what they want and that they have a suitable budget to match. It is a sign of maturity and that the individual has done his homework on the real estate market.
If you have not done any research on the real estate market, I recommend you start with this list,
- Determine how much you can borrow in terms of mortgage loan
- Understand the home features you need
- Research on the house location
- Research on the surrounding accessibilities
- Research on the surrounding amenities and conveniences
In fact, I’ve written an article about the 4 key factors you should consider when shopping for a home. This article will help you get started on identifying a suitable location and house for your family.
Besides that, I personally recommend checking out at least 20 new residential projects and 20 secondary units before deciding on a house. On top of that, get multiple opinions from various property agents or advisors on the same topic. This has helped me formulate my own personal opinion about the real estate market and the type of house I need for my family.
8. You are considering more than just the price tag
The true cost of homeownership is more than just the price tag. Behind every property transacted, there are hidden costs such as property taxes, agent fees and legal fees that can go up to 5% of the property price. Besides that, there are also costs for renovations, moving and maintenance to keep the place habitable.
Here is an exhaustive list of closing and recurring costs of homeownership for your reference,
- Upfront fees – earnest deposit and down payment
- Closing costs – legal fees, stamp duties and agent fee
- Monthly installments
- Maintenance fees
- Property taxes
- Home insurance
- Renovation and logistics costs
Here is an article on how much cash do you need to buy a home. In this article, we explore in-depth the true cost of homeownership and the many cost oftentimes not mentioned by your property agents.
9. You are planning ahead for the future
Buying a house is no simple feat. It is a huge investment that is meant for the long-term, seeing the typical mortgage tenure is for 30-years. Depending on what you intend to do with the house, it is important to have a plan before you sign the sales and purchase agreement.
if you are looking to use the house as a home for your family, then ideally, it is good to stay put for at least 5 to 10 years. If you can see yourself planting roots in the city with your family, then it is the right time to buy a home.
In contrast, if you are looking to use the house as an investment, then you ought to plan ahead how you can get the house tenanted as soon as possible.
On top of that, you want to have enough savings as a buffer for your monthly mortgage payments. I would recommend at least 6 months of monthly payments saved up as a buffer. Personally, I do have up to 1 year of monthly payment saved up in case of any emergencies,
10. You are ready to become a homeowner
Last but not least, you are ready to face all the travesty that comes with owning a house. The hassle of dealing with maintenance, connecting with contractors and sorting out property taxes are a few among the list of commitments required of a homeowner.
Check out this list to have a good understanding of the maintenance cost to consider as a homeowner.
Besides that, having a record of all your expenditure and learning to manage your taxes is a crucial skill all homeowners should have. A common mistake many young homeowners make is not having a record of all their expenditures, this includes me.
Having a record serves multiple purposes, primarily for the tax reporting to offset any expenditure made on the house. At the same time, it gives you a good understanding of how much you’ve spent on the property throughout the years. This is extremely important if you want to know how much you’ve made from the property transaction when you finally decide to sell it off.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
