How Much Home Can You Afford In Malaysia?
“Can I afford to buy a RM500,000 house with a RM 5,000 salary?”
“What kind of income do I need to buy a RM700,000 property?”
“How much should I spend on my mortgage?”
You have probably asked yourself variations of these questions while dreaming of buying your first home; and realized that it was not easy to answer. So here’s your guide to estimating how much you can afford to spend on a home.
What’s the maximum home loan you can get?
The maximum home loan you can get depends on your debt service ratio (DSR). This is the portion of your income that is used to pay off debt. Banks use the DSR to assess your ability to repay your mortgage. If your DSR is too high, your bank may not approve your mortgage application. Here is how the DSR is calculated:
DSR = (Total monthly commitments ÷ net income) x 100%
Total monthly commitments: car loan RM700 + RM200 PTPTN + RM200 credit card = RM1,100
Total net income: RM5,000
DSR = (RM1,100 ÷ RM5,000) x 100% = 22%
Banks will only allow you to borrow up to a certain amount of your DSR (on all of your commitments). It could be around 60% to 75%, but each bank will have different requirements. Here is an example of how it works:
- Suppose you have RM 1,100 in monthly commitments and RM 5,000 in monthly net income – this gives you a DSR of 22%.
- If your bank only lends you up to 70% of your DSR, this could mean that it will allow you to use up to RM3,500 (70% x RM5,000) of your salary on debt commitments.
- Since you are already spending RM 1,100 on existing liabilities, that means your maximum monthly mortgage allowed by the bank could be RM 2,400 (RM 3,500 – RM 1,100).
- With a loan term of 35 years and an interest rate of 3.5%, that could mean a maximum home loan of around RM580,000.
Your bank may have an online calculator that you can use to estimate your loan eligibility. However, each bank has different DSR requirements and may have different ways of calculating your DSR, so it’s worth checking with multiple banks.
How much house can you afford based on your salary?
While your bank may lend you up to a certain amount, you may not want to take the biggest loan available. This is because spending too much on a new home can put a strain on your finances. It might be more difficult for you to meet other financial commitments, such as daily living expenses, saving for retirement, or even investing funds for that overseas trip you’ve always dreamed of.
So how much should you spend on a house? The National House Buyers Association (HBA) suggests not to exceed one-third (or 33.33%) of your DSR on a home loan.
If you’re spending a third of your take-home pay (we’ll round that up to 30%), here’s how much you might need to earn to pay off these properties, assuming you’re a first-time home buyer who can borrow up to 90.% of the value of the property.
|Real estate prices||Deposit (10%)||Monthly repayment||Net monthly salary|
|241,960 RM||24,196 RM||RM900||3,000 RM|
|RM322 614||RM32,261||1,200 RM||4,000 RM|
|RM403,268||40,327 RM||1,500 RM||5,000 RM|
|483,921 RM||48,392 RM||RM 1,800||RM6,000|
|RM 564,574||RM56,457||RM2 100||7,000 RM|
|RM645,228||64,523 RM||2,400 RM||8,000 RM|
|RM725,881||RM72,588||2,700 RM||9,000 RM|
|RM806,534||RM80,653||3,000 RM||10,000 RM|
Assumptions: down payment of 10%, seniority of 35 years, interest rate of 3.5%, the buyer spends 30% of his monthly salary on a mortgage
However, the above estimates are only a general guideline. You may need to lower your expectations if you have a lot of financial obligations.
Some financial experts also suggest another rule of thumb for assessing housing affordability. The 28/36 rule suggests that you should not be spending more than 28% of your gross monthly income on housing and no more than 36% on debt. The 28% includes expenses all housing costs, which brings us to our next section …
What are the other costs of home ownership?
Owning a home doesn’t just mean paying a mortgage. You will also need to consider:
- Utilities. It can cost around RM200 per month for a 915 square foot apartment in Kuala Lumpur, although it depends on other factors such as the size of your household and usage. One 100 Mbps can knock you down another RM100 per month.
- Maintenance and repairs. Leaky pipes, peeling paint and broken air conditioners… a home can be expensive to maintain. According to the 2019 Household Spending Survey Report, Malaysians spend 4.4% of their monthly spending on furnishings, household equipment and maintenance.
- Management fees. If you live in a high-rise residence, you will need to pay a monthly management fee. Your rates will depend on the location and size of your property (eg RM 0.35 per square foot).
- Residents association fees. If you live in a closed or guarded residential area, you may have to pay additional fees.
- Insurance. There are a few types of policies associated with homeownership, such as mortgage life insurance, home and owner insurance, and fire insurance. Your costs will depend on the policies you choose to purchase and the value of your home.
- Assessment tax and rent to leave / plot. As a landlord, you will have to pay an annual assessment tax, which is usually 4% of the annual rental value of your property. You will also need to pay a starting rent (for land properties) or parcel rent (for strata properties), which is charged per square foot (for example, RM 0.035 per square foot).
These additional costs can make home ownership much more expensive. Before committing to buying a home, it’s worth estimating how these costs will weigh on your budget.
Know what you can afford
In short, your maximum home loan depends on how much your bank is willing to lend you. A lower DSR will increase your chances of getting approved for your home loan and help you get a bigger home loan. But don’t take the maximum home loan available if it puts pressure on your finances. A general rule of thumb is to keep housing expenses below one-third of your income, although you may need to adjust depending on your financial situation.
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