Shopping for a new property is always an exciting time. Other than the 4 factors you ought to consider in your property analysis, there is also the financial element that determines if the property is worth your sweat, blood and tears.
Like it or not, the financials of home buying can be puzzling to the inept especially when it comes to the financial jargon, such as down payment, earnest deposit, loan-to-value (LTV) and interest charged.
To make your home buying journey less stressful, do make use of this handy guide to your first property down payment.
What is a property down payment?
A down payment is the mandatory initial payment made to the seller or developer to secure a property. This lump sum payment is typically 10% of the property’s purchase price and is paid out of the buyer’s pocket. The rest of the debt is then satisfied through the agreed mortgage loan.
To help you understand better, you will need to at least RM50,000 out of your pocket for a property that costs RM500,000. This is the minimum 10% down payment of the property’s purchase price.
So what happens to the remaining 90% of the property’s purchase price?
Typically, the remaining 90% property’s purchase price is covered by a financial arrangement. In Malaysia, it is common to have to bank loan to satisfy the rest of the debt. However, here are some alternative ideas you can consider,
- Seller financing – The property seller acts as the bank and would hold the mortgage while you make payments
- Rent-to-own – There are a number of rent-to-own schemes in Malaysia to help first time home buyer
- Borrow from your parents – Get a loan from your parents in writing. The contract should cover promissory note and should not appear as a gift.
Do I pay a bigger down payment if I borrow less money?
If you borrow less money from the bank, assuming an 80% mortgage loan, then you will need to prepare 20% of the property purchase price as upfront payment.
Is down payment and earnest deposit the same?
Earnest deposit and down payment are not the same. The earnest deposit is money paid upfront to express commitment to the seller. The down payment is the money paid to the seller to be eligible for a mortgage loan, typically paid after the signing of the Sales and Purchase Agreement.
The earnest deposit is paid as part of the offer letter to the seller in a cheque form. If the seller accepts the offer, the cheque will be banked in. Typically, the earnest deposit is a non-refundable deposit to the seller, a 2% payment to show the buyer’s commitment to purchasing the property.
Having said that, it is possible to include clauses into the offer letter to protect the buyer’s interest against foreseeable circumstances such as rejected loan application and the seller backing off from the deal.
When it comes to buying property under construction from developers, an earnest deposit is not typically required. Instead, a booking fee is paid upon submitting an offer letter to the developer. The booking fee varies depending on the development and developer but is significantly less than the 2% payment required in an earnest deposit.
Regardless of it being a down payment or an earnest deposit, it is important to ensure that payment is made to the client’s account of a reputable real estate agency or responsible conveyancing law firm. There have been numerous scam cases involving property earnest deposits in the past.
To protect yourself against such property scams or schemes, never pay the earnest deposit directly to the individual seller!
Is down payment a fixed amount?
There is no fixed amount on property down payment. The typical down payment for properties is usually 10% of the property purchase price. Some home buyers are willing to put a bigger down payment to reduce their mortgage loan and the monthly payment amount.
Should I save for a bigger down payment?
Paying more cash upfront as a down payment to the property can reduce the overall mortgage loan amount and thus reduce the monthly payment. However, putting a bigger down payment may not be affordable for everyone and is only beneficial if you have specific financial targets in mind.
When do I need to save 30% as down payment?
Here in Malaysia, any citizen can have up to 2 mortgage loans with 90% LTV at any one time. If you intend to purchase a 3rd property by borrowing from the bank, the maximum allowable mortgage loan for the 3rd property is 70% LTV. In such a situation, you will need to save up for a bigger down payment – 30% of the property purchase price.
To clarify, if you have bought 2 properties previously and have recently completed mortgage payments on 1 of the properties, the next property is eligible for a 90% loan. This is because on record, you only have 1 ongoing mortgage loan and is eligible to have up to two 90% loan at any one time.
Should I put a bigger down payment on my first property?
In reality, a down payment of 10% on your first property is sufficient. This down payment will allow you to apply for a mortgage loan from banks with a reasonable interest rate. However, there is not much benefit in voluntarily opting for an 80% LTV or a 70% LTV loan especially if interest rates are low.
In my perspective, you might be better off investing the excess money in long term investments, such as an index fund, if you can afford a 30% down payment. This scenario is applicable if interest rates for the mortgage loan are lower than the average investment returns, depending on the investment vehicle of your preference.
- Property price : RM500,000
- Mandatory 10% down payment : RM50,000
- Mortgage loan interest rate p.a : 3.5%
- Excess 20% down payment : RM 100,000
- Index fund average returns p.a : 7%
If you compare the 2 situations, it really does not make sense to put in a bigger down payment if it is not necessary. The same RM100,000 if invested in an index fund over the next 35 years can possibly compound into a whooping RM1,000,000 portfolio. This is a big difference against the RM73,000 saved from having a bigger down payment.
Is zero down payment good for property investment?
The appeal of buying with zero down payment is painfully obvious,
- There is no need to save large sum of money
- Get to buy the property now, sooner than later
- The down payment money can be used for other purposes, furnishing or upgrades
However, I do need to caution you on zero down payment especially if you are buying a property from the developer. The large amount of rebates given by the developer is in reality not free. In most cases, these property prices are artificially inflated and given back to the buyer as a rebate.
Hence, it is important for you as the home buyer to compare property prices against the surrounding development. If the property is at a 10% – 20% premium from the surrounding development, then I would deem it as being overpriced and will not consider it in the first place.
On the flip side, if a property is at 20% – 30% lower than the surrounding development, it is more important to secure the deal with a suitable mortgage loan.
Having a zero down payment should be considered as an added bonus – if you cannot afford the down payment, I do not believe you are financially ready to buy the property.
When do you pay for the down payment?
The down payment is paid by the buyer to the seller once the Sales and Purchase Agreement (SPA) is signed, the total amount should meet the 10% payment. If a 2% earnest deposit was previously paid, it is will be considered as part of the down payment and the remaining 8% is due after SPA is signed.
Is the down payment refundable?
The property down payment is non-refundable and is considered a loss if the buyer is unable or unwilling to complete the sale. However, if the seller is unwilling to proceed with the property transaction, the down payment must be returned to the buyer.
In reality, once the Sales and Purchase Agreement is signed, an agreement is established between the seller and buyer. At this stage, the sale is considered to be complete and the down payment is paid to reduce the total amount owed.
In most cases, there is less issue with the down payment than there is with the earnest deposit because buyers do not typically rescind on their SPA agreement and will likely see it through.
Can I withdraw from EPF to pay for house down payment?
Yes, you can withdraw from your EPF account 2 to cover the house down payment. This application is only available for residential properties and is not applied to commercial and industrial properties. Besides, EPF withdrawal can also be used for principal repayments on your mortgage loan.
Is there any government programme on down payment assistance?
Saving up for a 10% down payment will always be a challenge for first-time homebuyers. Having said that, there are a few programmes that can help you with that,
1. My First Home Scheme (Skim Rumah Pertamaku)
My First Home Scheme was first announced in 2011 annual budget to assist first time home buyers earning a gross monthly household income of up to RM10,000 to purchase their first home.
2. Rumah Selangorku 2.0 (Only for properties in Selangor)
Different from the Rumah Selangor Affordable Homes (RSKU), Rumah Selangorku 2.0 includes down payment support for homebuyers opting for affordable homes within Selangor.
3. BNM’s Fund for Affordable Homes
The Bank Negara Malaysia’s Fund for Affordable Homes is primarily catered for the low-income groups to take up homeownership. As part of the initiative, the margin of financing may include down payment support and mortgage term assurance.
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.
