In my perspective as a property investor and enthusiast, there are 2 main components any homebuyer should consider.
First and foremost, you should consider if the dream home is worth the price it comes with. For example, a decent-sized terrace house in the city is priced at RM1,000,000 can be considered a good deal but you should not forget to consider the other parameters such as location, accessibility, amenities and centrality.
Secondly, you should consider your financial capability in buying the dream home. When it comes to financial consideration, you can think of it as 3 components to look out for,
- The upfront payments – earnest deposit and down payments
- The closing costs – legal documents, legal fees and stamp duties
- The recurring costs – monthly installments, maintenance fees and government taxes
As a general rule, a homebuyer in Malaysia should have 15% of the property purchase price as liquid cash to comfortably buy the desired property. This cash reserve is important to pay the upfront payments and the closing cost such as legal documents, fees and stamp duties.
1. Upfront Fees
The typical down payment for buying a home in Malaysia is 10% of the property purchase price, paid out of pocket by the buyer. This amount is affected by the loan margin offered by the bank, for example, an 80% loan will require you to cover the outstanding 20%.
To help you understand better, say you are looking to buy an RM700,000 condominium in Petaling Jaya. You received a loan offer with a 90% margin from Maybank, the bank will lend you RM630,000 to cover the cost while you will need to fork out the remaining RM70,000 for the down payment, be it from your savings or funding from the family.
In another scenario, for the same RM700,000 condominium in Petaling Jaya. You received a loan offer with a 70% margin from Maybank, the bank will lend you RM490,000 to cover the cost while you will need to cover the remaining RM210,000 out of your pocket.
What is the difference between earnest deposit and down payment?
Earnest deposit is typically 2% – 3% of the property purchase price, paid to the seller with the offer letter, as a symbol of commitment to purchase. In contrast, the down payment is the amount not covered by the bank loan and is paid out of the buyer’s pocket to purchase the desired property.
Earnest deposit – The amount of money paid by the buyer to the seller when an offer letter is provided. If the seller accepts the offer to purchase the property, the earnest deposit will then be credit into the seller’s account. The 2% – 3% earnest deposit is part of the 10% down payment and buyers should be careful not to overpay on the down payment.
What do I do if I cannot afford the down payment?
Buying a home is indeed a large transaction and requires relatively big savings to be able to afford the upfront payment. It is common that this question is asked from time to time.
In my opinion, there are a few ways to go about this,
- Apply for the highest loan margin you are eligible for
If this is your first or second property, then you are eligible to apply for a 90% loan from the bank. This is dependent on your credit rating and earning capability. - Consider new property with zero down payment scheme
This is a tricky option because often times, the zero down payment exists due to the property price being artificially inflated. While it helps you to afford the home of your dreams, it is worth considering the future reprecaussion when buying a property that is priced expensively. - Consider developers/sellers who are willing to do installment on the down payment
While it is uncommon, there is no harm asking the property agent/sales representative of the property you are looking to buy. In some cases, the developer might be willing to do a 6 months or 12 months installment on the down payment for a fixed interest. - You should save more
I know it is not the advise you want to hear but chances are you might not be financially ready to buy a home. Instead of succumbing to peer pressure and the social urges to be a homeowner as soon as possible, you will be in a better position if you save more while looking for good deals within your affordability.
2. Property Closing Costs
Did you know that buying and financing your dream home is more than just the down payment and mortgage loan?
In my experience working with first-time homebuyers, it is a common perception that cash reserve is limited to the down payment and furnishing cost. In reality, there are closing costs such as stamp duty, legal fees and others that should be considered when estimating your cash reserve.
As a rule of thumb, buyers should allocate 5% of the property purchase price to cover the relevant closing costs. The closing costs include stamp duties, legal fees, legal disbursement and government taxes on legal agreements.
Here is a quick breakdown of what to expect for the closing costs,
- Sales and Purchase Agreement (SPA) legal fee (based on property price)
First RM500,000 : 1%
Second RM500,000 : 0.8%
Subsequent RM2,000,000 : 0.7%
Subsequent RM2,000,000 : 0.6%
Subsequent RM2,000,000 : 0.5%
Excess amount : Negotiable but subjected to maximum 0.5% - Sales and Purchase Agreement (SPA) stamping fee
Approximately RM100 - Sales and Purchase Agreement (SPA) legal disbursement fee
Approximately RM600 – RM1000; subjected to legal firm - Loan Agreement (LA) legal fee (based on loan amount)
First RM500,000 : 1%
Second RM500,000 : 0.8%
Subsequent RM2,000,000 : 0.7%
Subsequent RM2,000,000 : 0.6%
Subsequent RM2,000,000 : 0.5%
Excess amount : Negotiable but subjected to maximum 0.5% - Loan Agreement (LA) stamping fee
0.5% of loan amount - Loan Agreement (LA) legal disbursement fee
Approximately RM600 – RM1000; subjected to legal firm - Bank processing fee for mortgage loan
RM50 – RM150; stipulated in the loan offer letter - Memorandum of Transfer (MOT) stamping fee
First RM100,000 : 1%
Subsequent RM400,000 : 2%
Subsequent RM500,000 : 3%
Excess amount : 4% - Transfer of ownership title fee
RM200 – RM500 - Valuation Fees (for sub-sale property)
0.3% of property value
Is there any way to reduce the closing costs?
There are a number of opportunities and tips that can help you save on the closing costs,
- Take advantage of the Home Ownership Campaign
The home ownership campaign exempts the stamp duty on the Memorandum of Transfer (MOT) up to RM1,000,000. Assuming that you are buying a condominium of RM700,000, that is a saving of RM15,000. - Some developers do include the stamp duty and legal fees
While not all developers provide this as part of their package, there are some who will absorb the stamp duties and legal fees for both the SPA and LA. In some cases, they will also absorb the legal disbursement fees. - Engage conveyancing firm with competitive rates
This tip does not move the needle on closing costs but is worth mentioning. When it comes to closing cost, the bulk of the cost comes from the stamp duty established by the government. However, if you are familiar with the law firm, you might get a much lower legal disbursement fee.
| Property Price | Down Payment | SPA Legal Fees | LA Legal Fees | LA Stamp Duty | MOT Stamp Duty | Estimated Cash Requirement | Percentage against Property Price |
|---|---|---|---|---|---|---|---|
| RM300,000 | RM30,000 | RM3,000 | RM2,700 | RM1,350 | RM5,000 | RM42,050 | 14.02% |
| RM600,000 | RM60,000 | RM5,800 | RM5,320 | RM2,700 | RM12,000 | RM85,820 | 14.30% |
| RM900,000 | RM90,000 | RM8,200 | RM7,480 | RM4,050 | RM21,000 | RM130,730 | 14.52% |
| RM1,200,000 | RM120,000 | RM10,400 | RM9,560 | RM5,400 | RM32,000 | RM177,360 | 14.78% |
3. Monthly Installment
As a general guideline, banks in Malaysia will typically lend up to 35% of your gross income. However, some banks do practise flexibility and can stretch this limit depending on the borrowers’ credit history and debt obligations.
To give you a gross estimate, this is how much you can afford in terms of monthly instalment,
- Monthly gross income : RM5,000
- Annual gross income : RM60,000
- Lending up to 35% of gross income : RM60,000 x 35% = RM21,000 per year
- Estimated monthly affordability: RM21,000 ÷ 12 months = RM1,750 per month
**Best to do a pre-approval with banks to understand your monthly affordability
| Property Price | Monthly Instalment | Estimated Monthly Salary (35% of gross income) |
|---|---|---|
| RM300,000 | RM1,155.88 | RM3,302.51 |
| RM600,000 | RM2,231.77 | RM6,376.49 |
| RM900,000 | RM3,347.65 | RM9,564.71 |
| RM1,200,000 | RM4,463.54 | RM12,752.97 |
**Best to seek pre-approval from banks for accurate estimates
Is there any way to reduce monthly installment?
- Extend the loan tenure to the maximum eligible period
- Borrow at a lower interest rate
- Borrow less money from the bank
4. Other Recurring Cost
Other than the monthly instalment to consider, there are other recurring costs to factor into your financial projection. These costs primarily include property taxes, home insurance and maintenance fees.
a. Maintenace Fee
Maintenance fee is typically collected from strata-titled properties such as serviced apartments, condominiums and SOHOs to maintain the common facilities. The cost to maintain common areas and facilities are shared by the owners and the monthly fee is paid to the Joint Management Body.
The amount for the maintenance fee is typically calculated on per square feet basis. If the maintenance fee is RM0.32/psf and your condominium unit is 1,300sqft, then the expected monthly maintenance fee is RM0.32 x 1,300 = RM416.
One thing to note, the maintenance fee imposed by the Joint Management Body for strata-titled properties is governed under the Strata Management Act 2013. Owners who do not pay up on the maintenance fee can be taken to court.
b. Home Insurance
Your home can be vulnerable to robbery, disasters and vandalism. Major insurance companies offer a range of insurance packages for your home – Fire insurance, homeowner insurance and householder insurance.
One quick tip on home insurance is to challenge the underwriting of insurance policy by the insurance provider. Oftentimes, home insurance covers the cost of building and land. In reality, it should only cover the cost of rebuilding only since the land cannot perish in a fire.
If you need a guide on house insurance, do check out this article where it covers the different facets of house insurance.
c. Property taxes
In Malaysia, homeowners are required to pay 2 kinds of property taxes, namely assessment tax (cukai pintu) and quit rent (cukai tanah). Assessment tax is paid semi-annually to the local authority for the upkeeping of public infrastructure while quit rent is paid annually.
The rates for each tax category depends on the property type and local authority. Do check out this article if you need any help understanding the different tax rates between condominiums and serviced apartments.
If you are looking to buy the home of your dreams soon, I hope you will consider all the relevant costs before making a long term financial commitment.
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.
