Question: 

Hi, I’m Cindy from Taiping. I have been working in Petaling Jaya for 3+ years and out of which, I had amassed RM 21,000 in savings. Presently, I’m earning a fixed salary of RM 4,000 a month after EPF and SOCSO deductions and incur a couple of fixed expenses such as RM 1,000 in car loan instalment, RM 500 in room rent and RM 200 in insurance premiums on a monthly basis. Typically, I would spend around RM 1,300 a month in living expenses, inclusive of light entertainment. 

Presently, there is a condominium unit near my work place that I’m interested in buying. It costs RM 350,000 and the developer is willing to offer me a 5% rebate on it. I’m eligible for a 90% loan on the property and thus, require me to put 5% in down payment for it. Apart from my savings, I intend to fund the 5% with EPF Account 2 of RM 10,000. The property will be completed in 2021. 

Here is my question: ‘Can I afford it and if I can’t, how much should I prepare to afford this property?’ 

 
Answer: 

Here, I’ll share 3 easy calculations that Cindy can do to gauge if she could afford to buy the condominium unit. 


Calculation 1: Cindy’s Financial Health 

From above, Cindy earns RM 4,000 a month and she spends RM 3,000 a month in total expenses (car loan instalment, rent, insurance and living expenses). She is able to save RM 1,000 a month, which is 25% of her monthly income and it is quite commendable.


She has RM 21,000 in savings, which equals 7 months of her monthly expenses of RM 3,000. This means, if she loses her job today, her savings would run dry if Cindy fails to secure herself a new job in 7 months and as such, her wealth ratio is 7 months.


Cindy has RM 1,000 in car loan instalment, which is her only debt obligation. As such, her debt-to-service ratio (DSR) works out to be 25% of her income.


Calculation 2: The Condominium Unit 

Let’s assume, Cindy is below 35 years old and the mortgage rate she is applying for is 3% per annum. If the 90% loan is based on the gross price of RM 350,000, her mortgage is RM 315,000 where her monthly instalment is RM 1,225. 

Monthly Instalment = RM 1,225

Cindy is required to put a 5% down payment on it, which is RM 17,500. Cindy is funding it with RM 10,000 from her EPF Account 2 and the remaining RM 7,500 from her savings. Thus, Cindy will be left with RM 13,500 in her savings account after committing to her brand new property. 

Savings Account After 5% Down Payment = RM 13,500


Calculation 3: Cindy’s Financial Health after buying the property 

Let’s say, Cindy buys her property to reside in it. As such, starting in 2021, Cindy will save RM 500 in rental payment. Therefore, inclusive of her mortgage, Cindy will increase her monthly expenses from RM 3,000 to RM 3,725 (this excludes a wide range of other expenses such as maintenance fees, sinking fund … etc). 

Instead of saving RM 1,000, she could only save RM 275 a month from her fixed salary of RM 4,000 per month. If she is to include other property expenses, it is possible for Cindy to not have any savings at all from her monthly income.


She has RM 13,500 in savings left and based on her new expenses of RM 3,725 a month, the amount of savings would then be equal to only 3.5 months of her new monthly expenses. Her wealth ratio will fall to 3.5 months. In essence, this means that Cindy could not afford to lose her job after buying her property.


Cindy will increase her debt commitment from RM 1,000 to RM 2,225 a month. Thus, her DSR will rise from 25% to 55.6% and it means that for every RM 100 a month in income, Cindy would spend RM 55.60 of it to service her debts. 

Can Cindy Afford to Buy her Condominium Unit? 

Sorry honey, if Cindy buys her property unit, she risks being in financial distress. She can’t afford to lose her job because if she does, she will lose her house. 

Ideally, I believe a person is financially fit to buy a property if he is able to attain the following financial health after purchasing it: 


a. Wealth Ratio (after buying the property) = 12 months

b. DSR (after buying her property) = maximum 30% of monthly income 


So, how much did Cindy fall short and should be raised before buying the unit? 

First, let’s start with her wealth ratio. Cindy’s new monthly expenses will be RM 3,725 after buying her property. Thus, after placing RM 7,500 to finance her 5% down payment partially, Cindy should have RM 44,700 remaining in her savings account. In other words, Cindy should only consider the property unit if she has RM 52,200 in her savings account, not RM 20,000.


Second, it is better for Cindy to only buy her property, if she could keep her DSR at a maximum of 30% after committing to it. This would mean that Cindy would need to raise her monthly income to a minimum of RM 7,417 from RM 4,000, if she wants to buy her property.


If You’re Cindy Today … 

You will probably think that I have just popped your bubble. 

It sucks to go through the maths to find out that you can’t afford the property. 

But, here is the thing. If you have below RM 50,000 in spare cash today, it could be better for you to withhold your purchase in real estate for it is likely that you cannot afford it at the moment. It could be prudent for you to invest instead on building your career or to start a side-business which could potentially turn into a legitimate business that will replace your full-time income. 

The homework is on raising your income and savings fast for the next 1-2 years, not on buying a property. Cindy can always come back into the property market to buy her condominium unit after attaining a higher level of income and having raised her amount of savings in her bank account.


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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