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Monday, October 28, 2024

The Financial Guide to Buying Your First House

The Financial Guide to Buying Your First House

According to Property Guru 2023, more than 70% of people in Malaysia own a home. Having a home provides a sense of security and achievement for the young Malaysians, but what should you consider before buying a house?  

Housing loans are valuable financial tools that enable individuals to purchase homes without having to pay the full amount upfront. Borrowers can repay the loan over time, along with interest. While owning a home is an exciting goal, it’s essential to carefully consider the implications before taking on a housing loan. For young Malaysians, evaluating factors such as interest rates, loan types, and personal budget is crucial. Being well-informed allows you to make the best decision for your future and ensures that your dream home remains a valuable asset rather than a financial burden. 


Interest rate 

When looking for a housing loan, it’s important to understand interest rates. There are two types of interest rates to choose from, fixed and variable.  


Fixed Rate 

A fixed-rate loan keeps the same interest rate for the entire loan period, making your monthly payments predictable. For example, if you have a fixed interest rate of  4%  on a RM200,000 loan for 20 years, your monthly payment would be around RM1,210. This amount stays the same throughout the loan term.  



Variable Rate 

In contrast, a variable-rate loan might start off lower but can change over time, which could increase your payments often based on changes in the OPR or other benchmarks. Initially, variable rates may start lower than fixed rates, but they can increase or decrease, affecting monthly payments. For instance, if you begin with a variable interest rate of  3%  on the same RM200,000 loan, your initial monthly payment would be about RM1,054. However, if the interest rate rises to  4.5%  after a few years, your monthly payment could increase to around RM1,265.  


 

Overnight Policy Rate (OPR)   

The Overnight Policy Rate (OPR) is an interest charge set by Bank Negara Malaysia (BNM), the country's central bank. Banks in Malaysia use the OPR to establish their Base Rate (BR) for variable rate loans. Changes in the OPR reflect the economic conditions; BNM may lower the OPR to encourage spending and stimulate the economy or raise it to promote saving and slow down spending. Consequently, a higher OPR leads to increased loan interest rates, while a lower OPR results in lower loan interest rates. 

 

Variable rates  are influenced by changes in the OPR. When the central bank adjusts the OPR, it can affect the interest rates that banks offer for variable-rate loans. As a result, your payments may increase or decrease depending on changes in the OPR. 

 

Fixed rates, however, remain unchanged for the entire term of the loan. Once you lock in a fixed rate, it is not directly affected by OPR changes during that period. However, the initial fixed rate may be influenced by the OPR at the time you take out the loan. 

 

In summary, only variable rates fluctuate with the OPR, while fixed rates stay the same once set. It’s also essential for young Malaysians to know how to calculate their loan payments and understand how interest works. This basic knowledge helps in making smart financial choices.  When calculating the rate, it involves how much down payment that is being made, the tenure, your income and many more. 

In Malaysia, interest rates on housing loans can differ from bank to bank, often influenced by the main interest rate set by Bank Negara Malaysia. By knowing these details, borrowers can find the best loan option for their needs and avoid future surprises. So, generally speaking, a lower interest rate is better, while a higher interest rate can lead to more costs over time. 


Types of Loan 

When choosing a housing loan, it's important to know the different types available. Common options include term loans, semi-flexi loans, full-flexi loans, and Islamic loans.  


Basic Term  

Term loans are straightforward and usually have fixed repayment terms, making them the most common loans in Malaysia. They can get up to 25 years of tenure. The downside to this loan is basically because you can’t pay more than the actual amount, for some cases you can even get a penalty by doing that.  


Semi Flexi 

Semi-flexi loans lets you make extra payments to lower the amount you borrowed. So, when the amount is lower, the principal will also lower. This will also lead to a lower interest rate. As a result, the tenure also will be shortened

It is important to note also that a semi flexi interest rate can be higher than a basic term interest rate. 


Full Flexi 

Full-flexi loans provide even more options to pay off the loan when you want. You can consider it as a more upgraded version of semi flexi loan. The main difference that separates this loan from others is the benefit of the customer where they can redraw the extra principal payment whenever they need to use the money. Yes! You heard that right, customers have the option to withdraw back their money in this loan contract. That is why it is called fully flexible. 


Islamic Loan 

Islamic loans follow Shariah law and are gaining popularity among those looking for ethical financing options. Islamic Banking (IB) offer/charge profit in their contracts instead of interest. The profit that they acquired is from a sale-based contract, which is permissible in Islam. Products/contracts include like Murabaha, Musyarakah Mutanaqisah (MM), Bai bithaman Ajil (BBA), Ijarah Muntahiya Bit Tamlik (IMBT) and more. Overall, understanding these loan types can help young Malaysians make informed choices when buying their first home. 


Budget  

When planning to take out a housing loan, budgeting is a key step that young Malaysians should opt overlook. It is essential to have a clear understanding of your monthly income and expenses. Start by figuring out how much you can comfortably pay each month for your mortgage without putting too much strain on your budget. Remember to include other costs, like property taxes, insurance, and maintenance fees. 


Debt Service Ratio (DSR) 

Before applying for a housing loan, the bank will first need to consider a few things before approving your application. One of the first few things that the bank will look at is your DSR. It is a ratio that can help measure your ability to pay/settle your debt. DSR can be calculated by dividing your monthly commitment and income. Then to get the ratio percentage, you need to multiply it with 100. Example, your monthly total commitment is RM1000, and your monthly net income is RM4000. The calculation should be (1000/4000) X 100) =25. So, from the example, your DSR is 25%. Normal DSR should be around 30% to 40%. 


Downpayment 

The down payment plays a huge part in monthly payment which is usually a percentage of the home price. For example, if the house costs RM300,000, a 10% down payment would be RM30,000. The logic here is the more down payment is made, the less you have to pay monthly. Some developers even waive the downpayment. There are also promotions for first-time home buyers where the downpayment is waived.  

 

SPA (Sale & Purchase Agreement) 

What is SPA? Basically, it is a contract between a buyer and a seller. Both parties mutually agreed on the condition. That’s why it is called an “agreement”. By having SPA, it helps in ensuring that there is no change in the contract and also to avoid customer/buyer from being manipulated. Signing the agreement basically means that you are closing the deal.  

It also can be used as evidence in case anything happens during the loaning process.  Cancelling the SPA can lead to you getting penalized. 


Stamp Duty 

Stamp Duty is a tax that is being imposed on documents or instruments. Examples such as contracts, agreements or any other written document specified by law. It is important to formalize any documents for them to be legally recognized. You will get penalized if you don’t do stamp duty. 

Stamp duty needed to be paid within 30 days (about 4 and a half weeks) following the execution of the property transaction. Failure to do so can lead to penalties. 

Nowadays, we can say that the price can be range between RM 50 to RM 50,000 in malaysia. The price can vary based on the property price. If the property value is high, then the stamp duty value also will be high. 

 

Conclusion

In conclusion, taking out a housing loan is a significant step for young Malaysians looking to own their first home. Understanding interest rates, such as fixed and variable options, is crucial for making informed choices. Additionally, knowing the different types of loans available like term loans and Islamic loans can help borrowers find the best fit for their needs. Finally, careful budgeting that includes down payments, legal fees, and other costs is essential to ensure that homeownership remains a positive experience. By being well informed and prepared, young Malaysians can confidently navigate the housing loan process and move closer to achieving their dreams. Ultimately, taking the time to educate themselves will lead to smarter financial decisions and a more secure future. 

  

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