Home Ownership in Malaysia
The home ownership rate in Malaysia accumulates up to 72.5% which is among the highest in Asia. However, many are trapped in debt being unable to pay monthly instalments promptly resulting in the rising amount of auction houses.
Buying a house before marriage has become a norm that many young working adults are pressured into owning one despite their financial ability. While it is a goal of many to own their dream home, is it financially better to buy or rent?
The Financial Costs: Buying vs Renting
As a comparison, the scenario below depicts the differences between buying and renting a house.
Tool Used: Edge Prop
Summary: On the 5th year, buying a house would be much cheaper than renting. Under these circumstances, it will be better to buy than rent if you plan to live in that house for more than 5 years.
Disclaimer: The scenario used above is solely a representation to reflect the financial cost of buying or renting a house. The figures stated does not predict or represent the current market conditions.
3 Questions to Ask Yourself Before Buying or Renting a House
This then bags the question of “When is the right time to buy a house?” or “Should I rent first and buy the house later?”.
The most accurate answer that we would advice is, “Well, it depends”. The situation will very much depend on your financial circumstances.
1. Do you have enough money?
As realistic as it seems, yes. You need to be able to afford the 10% of the down payment for the house. Well that is if the bank grants you with a 90% loan. Not to forget other costs such as legal fees and stamp duties. This then relates to the next question; do you still have sufficient savings after buying the property for rainy days? It is not wise to even borrow for the upfront deposit as it will likely to overburden you financially.
2. Are you able and willing to commit?
The loan tenure for a mortgage loan is usually longer due to the higher loan amount. You need to be disciplined by committing to pay monthly instalments for a longer period of time. The maximum loan tenure is 35 years. Due to unforeseen circumstances, it is also important for you to have an emergency fund in case you lose your employment income in the future.
3. Do you plan to stay in that property for a long term?
Do you plan to sell the house in the future? This is the question that you should further narrow down and ask yourself to know the exact purpose of staying in that house.
If you answered ‘no’ for all the 3 questions or if you are unsure about most of the questions above, then renting might be a better option for you. But if it is a strong yes for all 3, then congratulations! You are ready to buy a house.
Why Renting a House is not a Bad Option?
Many are swayed with the misconception that renting is a shameful move. In fact, there is nothing to be ashamed of. Renting is a popular culture in the west. The 3 obvious benefits of renting are:
- Lower upfront cost & commitment. While renting requires to pay security deposits, this is a significantly lower amount as compared to the upfront 10% deposit of buying a house.
- Flexibility of moving around different locations because renting is usually based on a short-term basis.
- Fixed commitment per month as you do not need to worry about unexpected home repair expenses. These are usually taken care off by the landlords.
Why Buying a House is Cheaper?
Warren Buffet once said, “Don’t save what is left after spending; spend what is left after saving”. Only buy a house if you can afford it. After all, buying a house can increase your net worth. The returns are based on the increase of property prices and not by how much is invested. If you manage your financials well, you can buy a house with a salary below RM3,000.
- House is an asset. A house is a long term investment. It can be inherited by your future generation. Otherwise, if that house is an investment, you can always rent it and the rent money would be able to (partly) cover your monthly loan instalments, if it is utilised properly.
- The property price has increased by 9.8% between 2007 to 2017 and it is very unlikely to decrease within a short period of time. The best time buy a house was 10 years ago. The next best time is today.
- Lower cost in the long run as shown in the comparison illustrated in the section above.
If you are able to afford to buy a house that you like, you are putting good money for something of real value. Debt can be a good debt, as long as it delivers long term value or income in return. As a start, you can opt for ‘sub-sale’ or auction houses which usually offers a much lower price compared to new residential property developments. However, you will need to do more diligence as it may not have “warranty” as those provided by developer for new built homes.
So, Should I Buy or Rent?
There have been many ongoing debates dictating that renting is better or vice versa. However, generally you are the one who makes the call. It is important that you weigh the pros and cons between buying or renting a house. Then, evaluate it based on how each option will fit with your financial situation. Remember, there is no right or wrong between buying or renting a house. Choose the one that best fits you!
For those who cannot afford to buy a house now but wishes to own one, this could be an option worth checking out especially for first-time homebuyers. In the recent Budget 2020, the government has introduced a financing scheme called ‘Rent-to-Own’ (RTO). The purpose of this scheme is to aid first-time homebuyers who are facing difficulty in paying the upfront 10% deposit and access to financing to buy a house. The scheme caps property value up to RM500,000.
So how does this scheme works? For the first 5 years, the applicant will rent the property. After the first year, the tenant can decide whether to purchase the house based on the price fixed at the time the tenancy agreement is signed. Exemptions would include stamp duty.
This article is prepared by Direct Lending, an online personal lending platform with the mission to provide simple, safe and affordable financing to all hardworking adults. We help borrowers to find, apply and receive financing that most suit them. Our service is 100% free.