Before answering this question, let me add a few more criteria to this question:
- The property is not an under-construction unit.
- No existence of marking-up prices in your sales & purchase agreement (SPA).
- The property is bought individually without co-ownership with partners.
What then, would your answer be?
In this article, let’s assume that you are now below 35 years old and plan to buy a piece of property priced at RM 500,000. Here, I will provide the breakdown of its cost so that you can budget for it in advance and gauge how close or far you are currently from your property. Thus, the following are a list of 5 things which you would want to prepare prior to buying a RM 500,000 property.
For first-time property buyer, you may obtain a loan-to-value (LTV) up to 90% of the property price. This means, if the property is priced at RM 500,000, you can fund the purchase with a 10% down payment amounting to RM 50,000 and the remaining 90% with a mortgage amounting to RM 450,000.
2. Property Related Transaction Costs
There are five transaction costs you will incur when buying a property. They are legal fees and stamp duties for the drafting of your sales & purchase agreement (SPA) and loan facility agreement and as well as a valuation report on the piece of your property. Here are some pointers for each transaction costs:
a. Sales & Purchase Agreement (SPA)
SPA is a document that lists down terms and conditions of the purchase of your property. It is prepared by your preferred lawyer and the legal fee is payable as soon as he has completed the drafting of your SPA. The legal fees on your SPA is set to be 1% of the purchase price of your property. Coincidentally, you’ll bear a list of expenses such as memorandum of transfer (MOT), statutory declaration to declare that you are a non-bankrupt, 6% Sales & Services Tax (SST) and other
b. Stamp Duty on SPA
It is a cost payable to the government. The rate of its stamp duty is tabulated as follows:
However, with effective to 1 July 2019, the amount of stamp duty chargeable is remitted for a sum of RM 5,000 if the property is a residential property which is priced between RM 300,000 to RM 500,000 and is bought by a first-time buyer.
Therefore, the final amount payable would then be reduced to RM 4,000, after a remittance of RM 5,000 from RM 9,000.
c. Loan Facility Agreement (Loan Agreement)
Loan Agreement is a document that states the terms and conditions of the loan granted to you by your preferred bank. While this agreement is drafted by your preferred lawyer, he must be a panel of your preferred bank. The legal fee is set to be 1% of your loan amount. Likewise, you’ll incur a couple of expenses which include charge annexure, both the entrance and withdrawal for private caveat, statutory declaration, a 6% SST and other miscellaneous costs.
The final fee is also quoted by your lawyer and hence, you may shop around for the best deal prior to engaging your preferred lawyer. In many cases, property buyers may engage the same lawyer to draft both his SPA and Loan Agreement for it is more cost and time efficient.
d. Stamp Duty on Loan Agreement
Stamp duty on a loan agreement is chargeable at a flat rate of 0.5% of the loan amount and it is payable to the government. From above, if a first-time buyer is obtaining a mortgage amounting to RM 450,000, most likely, the final figure for his loan amount is greater than RM 450,000 for he would purchase MRTA.
Let’s assume that his cost of MRTA is RM 10,000 and is included into his loan. In his case, the loan amount is RM 460,000 and his stamp duty on loan agreement would be as much as RM 2,300.
However, with effective to 1 July 2019, the amount of stamp duty chargeable is remitted for a sum of RM 1,500 if the property is a residential property which is priced between RM 300,000 to RM 500,000 and is bought by a first-time buyer.
Therefore, the final amount payable would then be reduced to RM 800, after a remittance of RM 1,500 from RM 2,300.
e. Valuation Report
Valuation report is prepared by a certified property valuer to evaluate the value of your property. The valuer is usually appointed by your preferred bank for the bank wants to know the value of the property before disbursing the loan to you as the bank is conservative. The cost of a valuation report is determined by the value of the property. For a RM 500,000 property, the fee could approximately priced at RM 1,500, more or less.
Put Them Together
If we add up the five property related transaction costs above, the amount that one should prepare would be as follows:
3. Can You Qualify for a Mortgage Amounting to RM 460,000?
Assuming that the first-time buyer is below 35 years old, the monthly mortgage installment he needs to pay is around RM 2,100 to RM 2,200, depending on the mortgage interest rate of his loan agreement which ranges between 4.0%-5.0% per annum.
Typically, a bank may capped a buyer’s borrowings up to 60% of his net income, which is income netted after EPF, SOCSO, and tax deductions. The 60% is called the maximum allowable debt service ratio (DSR). As such, the bank would most likely approve the mortgage application of a buyer if his DSR is below 60% after factoring in new mortgage and all of his other loan commitments such as credit card debt, car loans, personal loans, PTPTN … etc. Let me give you an example.
Let’s say, we have James, a property buyer. His monthly net income is RM 6,000 and is servicing RM 1,800 in car loan installment, RM 300 in PTPTN installment, and RM 200 in credit card debt. Therefore,
What if James’s car loan installment is RM 500 a month and has no credit card debt?
In general, the renovation cost of your property is dependent on the following:
- The state of your property.
- The size of your property.
- The purpose of renovating your property.
- The intended design of your property.
- Do you want to DIY or have a contractor to renovate your property?
Therefore, it is hard to estimate the renovation cost of your property. But, from experience, a contractor may quote a renovation fee ranging from RM 40-50 on a per square foot (psf) basis to renovate your property. If you wish to have a lot more luxury in your property, the fees would understandably be higher.
Let’s say, the renovation fee is RM 45 psf. Thus, the renovation cost of a 600 sq. ft. property unit would cost RM 27,000. Whereas, if it is a 1,000 sq. ft. unit, the renovation cost would be RM 45,000. Gulp! Perhaps, you can save a lot more if you undertake the renovation and refurbishment of the property yourself. This, I believe, is recommended only if you have a knack for doing it. Otherwise, you could be either inheriting loads of headache, lose time on productive activities, or worse, be the one who screw up your own property.
5. Build a Buffer
This is especially true for buyers who intend to rent out properties for income. I think it is a big mistake to just safely assume that you would eventually secure a nice tenant once you put up your property for rent.
While hoping for the best, it is prudent to also prepare for the worst. Thus, this is why we build a buffer to face such eventualities.
Typically, you’ll incur the following recurring expenses as a property owner:
- Mortgage Installments: RM 2,100 – RM 2,200 a month
- Maintenance Fees: depends on psf and type of your property.
- Utility bills: Water, Electricity, and WiFi Connection.
- Quit Rent and Assessment.
Here, let’s round the figures up to RM 3,000 a month. Hence, the question that you may ask is: ‘Did you set aside RM 36,000 in cash as a buffer to pay for all of these recurring expenses should you lose your monthly income today?’
How Much Do You Need before Considering a RM 500,000 Property?
It is time to put everything together. Let’s assume that the size of your property unit is 1,000 sq. ft. Therefore,
Does it mean that I need to save up RM 145,500 first before buying a property priced at RM 500,000?
My answer is yes. That is the best if you can do that.
But, what if I don’t have that amount?
Well, perhaps, you may want to reconsider your options. For instance, you may
- Earn and save more until you accumulate RM 145,500.
- Negotiate the price of your intended property downwards to RM 450,000.
- Downgrade your property budget to RM 300,000 – RM 400,000.
In any case, it is better not to buy a piece of property if you cannot afford it.