It is common these days to hear people say, “If you have the money, you can do many things.” This statement may technically be true, but it can cause some misunderstanding. It is quite popular among the majority of public who place great importance on a high salary, huge bonus and big profit. Who doesn’t want all these, right? We are always taught to generate higher income to enjoy a richer lifestyle.
Due to this biased understanding, we fail to understand the importance of prudent financial management as we focus on generating more income. We assume that by generating more income, we can buy all the things we want—that bungalow, that new car or even that five-star vacation. Even with seemingly abundant wealth, there are those whose house was foreclosed or car repossessed while decent income earners could have a clean and comfortable house. These people can even bequeath their houses to their beneficiaries without any debt.
The fact is, anyone can buy a house even with a small salary. The key to it is by having wise financial planning in place. Let’s look at these three (3) guidelines for buying a house:
- Having continuous income
The case mentioned earlier about house foreclosure, even for a wealthy owner, usually happens because the income was disrupted or has ceased even though he can afford the house in the first place. When he lost his job or his business closed, he no longer had any income stream to pay for the house instalments.
Without prudent financial management such as putting aside savings every month for an emergency fund (e.g. 6 months’ cost of living in the event of loss in income), maintaining an alternative source of income or passive income, or saving liquid assets that can be sold for immediate cash, you have a better chance of keeping your home. Therefore, no matter whether you have a high salary or low salary, ensure that the fund for your house instalments is secure. That is the key.
- Comfortable affordability
Comfortable affordability is not a question of high or low salary. You may presume that the higher your income is, the more you can afford to buy a house. Yet, there are those
with money who struggle to pay their house instalments. They may earn more money, but they also have high financial commitments with little excess funds for other needs. They may be able to pay all their debts, including house instalments, but they are not within the comfortable zone of affordability.
In short, they use a significant portion of their income to pay debts. This is a high-risk financial position because, at any time, sudden financial emergencies can happen such as involving in an accident, falling ill and other similar events. This can be the beginning of trouble when they start to fall behind in their debt repayment.
Hence, to be in better control of your finances, it is wise to maintain a total monthly debt repayment of not more than 40% of your income. For example, if your monthly income is RM3000 and your car instalment is RM500 per month, comfortable affordability for a house instalment should not be more than RM700 per month (provided you have no other debts to pay). Therefore, regardless of your salary, ensure your total monthly commitment for your debts (including housing loan) does not exceed 40% of your total income. That is the key.
- Financially prepared for other than house instalment
Other than house instalment, there are other one-off costs you need to take into account such as the deposit (10% of the house price), legal fees for the Sale and Purchase Agreement and loan agreement, and stamp duty to the government. If you are buying a house with a cost of RM150,000, it is reasonable to prepare a cash allocation of RM10,000 to RM15,000 for these costs.
Mind you, these costs do not include renovation. So, if you are buying a newly built house, another allocation of RM10,000 would be comfortable to cover renovation costs, depending on your specifications.
So, it is important to do a preliminary survey for such costs before purchasing a house. Avoid getting another loan (e.g. personal loan which comes with higher interest being an unsecured facility) to fund these costs. Those with lower incomes are advised to allocate for such costs by saving consistently. Those with higher income are advised the same too especially if you are purchasing a luxurious home. That is the key.
There you go! Here are three simple yet comprehensive guidelines to buying a house. The strategy to buy a house and maintain the repayment comfortably throughout the loan tenure is simple in concept, but requires commitment and discipline.
Buying a house is a big investment and a long-term commitment as it is not some retail purchase that can be done at any time with a credit card. Even for buying groceries we are encouraged to plan our budget, buying something more significant like a house requires even more rigorous planning and budgeting.
For peace of mind and comfortable life through prudent financial planning, get more of our guidelines and tips on financial management from AKPK’s webpage at www.akpk.org.my.
Agensi Kaunseling dan Pengurusan Kredit (AKPK), is an agency set up by Bank Negara Malaysia in 2006 to help individuals take control of their financial situation and gain peace of mind that comes from the wise use of credit. With this mandate, AKPK provides Financial Education services to individuals and micro, small and medium enterprises (MSMEs) through its POWER! Portal and Knowledge Centre for various online learning modules and materials—both accessible through AKPK’s website. Financial management talks are also available for organisations.
AKPK also provides Financial Advisory services as well as Debt Management assistance through the Debt Management Programme (DMP) for individuals, and the Small Debt Resolution Scheme (SDRS) for MSMEs, which involve a mutually-agreed loan repayment plan between the borrowers and the financial institutions.
All financial advisory and debt management services by AKPK are FREE and NO AGENTS OR THIRD PARTIES are appointed to represent AKPK in any way.