If you (like many young Malaysians) are looking towards buying your first home; the most important question you’ll probably ask yourself is if you can afford it. Well, can you? Think of the number of payments you’ll have to cover on the road to home ownership; there are entry costs, monthly repayments, recurring taxes, insurance and more pressingly – the deposit.
Deposits and monthly repayments are what concern first-time buyers the most, because both are seen as real-time cash outlays. With monthly repayments though, the ambiguity of flexible instalments allow for some freedom.
But that is not the case with deposits because, it’s either you have it or you don’t, and this along with the rising cost of ownership is why so many banks now offer up to 100% financing for home loans.
Still, is it a good idea to utilise the option and how much do you really expect to place down for your first home?
Let’s take a look at financing margins in today’s market:
What are the typical margins of financing available?
- StandardMost banks offer financing for up to 90% (Hong Leong Housing Loan/HSBC HomeSmart) of the purchase or valuation price, and this remains the standard.If you have sufficient cash to put down, this option is beneficial due to its lower total interest costs applied. This, when compared to higher margins and full financing.
- Higher MarginsFor those with lesser funds to spare on the loan deposit, a higher margin or full financing would be preferable and is available.Loan products offered by banks such as Ambank Home Link provides up to 95% financing with competitive rates of 4.45% p.a. for loans above RM200,000.It should be noted that financing options as such are generally made up of 90% of the home’s purchase or valuation price plus 5% for insurance and entry costs plus 2% of the legal fees for your loan (equals to 97%). This essentially means that the deposit can roughly remain at 10% of the purchase price, but as other costs are factored-in, you take on a bigger loan amount with more substantial interest costs overall.
On the plus side, loans that offer full or higher financing could be the cheaper option in the short-term.
- Full FinancingUnder the ‘My First Home Scheme’, participating banks are offering 100% financing, which is good news for those without the funds needed for a down payment. The major gripe with the scheme is that approval rates aren’t very promising. Others claim that it is not a feasible loan, since the maximum loanable amount may be too large for its capped salary range.Other packages that exist in the market for full financing usually fall under Islamic financing. For instance, Maybank Commodity Murabahah Home Financing-I, also provides full financing but through Shariah-compliant commodity brokerage.**Note that for full and even higher margins of financing, a guarantor may be needed to support your application. In addition, banks could ask for added security in the form of a fixed deposit or other financial collaterals pledged.
How Zero Entry Cost Loans Affect Deposits?
Zero-Entry Cost loans, are not necessarily meant to help you save money, rather it provides access for new buyers (usually) to get their foot in door.
It essentially removes “barriers” to entry (stamp duties and legal fees for S&P and loan agreements as well as valuation), hence the name. Nonetheless, you’ll still need to come up with the deposit.
Depending on the type of loan and margin of financing, zero cost loans may be available, but should you take advantage of it to indirectly help with your deposit commitment?
- Whatever savings or outlets you may have to pay a deposit, expect for it to be somewhat diminished, without the help of a zero entry cost loan. In other words, what you can afford is now limited, thus you will most likely need to look for homes with lower price tags. You don’t have to look at this as a negative, because as you adjust to your circumstances, there are potential interests to be saved.
- Conversely, with the help of a zero entry cost loan, you are now freeing up the funds you do have, to focus on deposit payments. Therefore, you have the option to look for more expensive homes, or still go for the cheaper option with a greater down payment. Remember that the minimum deposit is just a recommendation – you can always put more down, reduce tenure and overall total interest costs or maintain tenure and lower monthly instalments.
How else can you obtain funds for a deposit?
Assume that you don’t qualify for 100% financing and even 95%, doesn’t quite cut it for you to make the deposit payment with the funds you currently have. Don’t fret, you may still have options:
- -EPF WithdrawalIf you have been working for some time, the accumulated sum in your EPF Account II may be used to help with deposit payments.You can either withdraw all the money in the account or 10% of the home purchase price plus the difference between the loan and purchase price (whichever is lower).
- -Life Insurance Cash Withdrawal OptionReducing the cash value on your life insurance policy to pay for down payment is viable, yet serious consideration is necessary before you withdraw.In fact, it should only be utilised, if you have very little funds to make the deposit or still need aid for the additional costs of home ownership.
If I have the funds, should I deposit more or less of it into my loan?
The answer depends on your financial goals and current status. Have you just received a big bonus that you’d like to put to good use? Then you might opt to borrow less and save more money on total interest costs over the tenure of your loan.
If however, you are not willing to put more down for your home purchase, then it’s a good idea to use those funds to cultivate your finances.
Deposit levels are dependent upon the final cost of your home purchase, again – the sale price is not really the final amount. But there are “helpers” that exist in loan products that seemingly absorb various costs associated with your purchase, and so as a prudent buyer you will need to look beyond the sales pitch.
Consider if these costs are really being absorbed, albeit with higher interest rates, or merely stretched out for you. Neither is a bad option but a thorough understanding of the trade-off for a lower deposit VS higher upfront fees will help you decide if the added long-term costs and conditions (longer lock-in period, etc.) are truly worth it.