Bankruptcies in dire straits

Datuk Chang Kim Loong is the Honourary Secretary- General of the National House Buyers Association (HBA). Image from PropertyGuru

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A nightmare when you end up being declared bankrupt and when your life is then restricted. 

The National House Buyers Association (HBA) refers to the article entitled “Look before you leap into debts” published by The Star on 23 June 2022. We agree with the findings of the article on the possible repercussion of failing to repay your loan obligations which can include being declared bankrupt. 

HBA would like to remind all aspiring house buyers that buying a property is the single biggest financial purchase and commitment that the average Rakyat will make in his or her lifetime. Careful thought and planning must be done before buying a property and undertaking a housing loan. 

Based on Bank Negara Malaysia’s Financial Stability Review Report Second Half 2021 (BNM FSR H2-2021), the median property price in Malaysia is 4.7x the median income in Malaysia and can be classified as “Seriously Unaffordable” by international standards.  

This means that house buyers have to pay more for their houses as compared to what they can ideally afford and be saddled with burdensome housing loans which can lead to financial ruin if the house buyers are not able to service the housing loans over the tenure of the loans. 

HBA are no accredited financial planner but we would like to offer some layman’s financial advice to aspiring house buyers on what to do when buying your first home. 

Avoid other loans before buying a home

This article is jointly written by Sharifah binti Razali and Datuk Chang Kim Loong of the HBA.

The most important advice for aspiring first-time house buyers’ is: ‘don’t take a car or personal loan until you have bought your first home’.   Based on BNM FSR H2-2021, 65% of borrowers already possess either a car or personal loans, thereby limiting their capacity to take on new borrowings for housing.  

Typically, the ‘rule of thumb’ by Banks in Malaysia pertaining to loan instalments are: 

  • single loan instalments should not exceed 1/3 (or 33.3%) of the gross income; and 
  • combined loan instalments should not exceed 1/2 (or 50.0%) of the gross income. 

Let’s take the example of Albert who is currently earning RM3,500 a month.  Based on the above rule of thumb, the maximum loan instalment that banks will give to Albert is RM1,167 for a single loan instalment and RM1,750 for all combined loan instalments. 

Albert is now looking to buy a property worth RM290,000 and which will be financed via a 30-year housing loan of RM261,000 (90% margin of financing) at effective interest rate of 3.25% p.a. The monthly instalment for the housing loan will be RM1,136 per month.  

Will Albert qualify for the above housing loan and what if Albert already has an existing car loan with a monthly instalment of RM800 per month which may not seem to be very high? 

 without car loan 
with car loan
Monthly Income   3,500  3,500  
Car loan instalment  –   800  
Housing loan instalment   1,136  1,136  
Total monthly loan instalment commitments   1,136  1,936  
First loan instalment / monthly income   32.5% 22.9% 
Combined loan instalment / monthly income    32.5% 55.3% 
Max housing loan instalment for Albert after adjusting for existing car loan Not applicable 950  

Based on the above example, if Albert does not have any existing loan obligations, he will qualify for the above housing loan which has monthly loan instalment of RM1,136 as it is only 32.5% of his monthly income and is below the rule of thumb of 1/3 or 33.3%.   

However, if Albert has an existing car loan with a monthly instalment of RM800, he will not qualify for the said housing loan as the combined loan instalments of the car loan and housing loan is 55.3% and is above the rule of thumb of 1/2 or 50%. 

The maximum instalment that Albert will be able to qualify for is only RM950 which will limit his choices of properties that he is able to buy. 

Maintain a standard of living 

The second piece of advice that we wish to give to all aspiring first-time house buyers is to do a proper budget on what they can really afford before buying their first home.  Aspiring first-time house buyers need an extensive budget to see if they can afford the monthly loan instalments and maintain their current lifestyle.  

After that, they need to factor in potential changes in lifestyle such as having children or aging parents to take care of and whether they can still afford the loan instalments.  There is no point in having to skip meals or not having children just to be able to afford the housing loan instalment. 

They also need to factor in additional costs other than just the monthly housing loan instalments such as maintenance charges and contribution to sinking funds for stratified properties, insurance, quit rent, and assessment charges into their monthly budget. 

In addition, ideally, aspiring house buyers should have at least 10% of their gross income as savings after factoring in all the above expenses and also the loan instalments to cater for sudden emergencies as many people in Malaysia don’t have enough savings for emergencies., 

Based on a study by Perbadanan Insurans Deposit Malaysia (PIDM), a government agency under the Ministry of Finance, the majority of respondents (55%) have less than RM10,000 in available savings to draw on in the event of an emergency. 

Only buy a home when financially ready

The next advice that HBA wishes to give to all aspiring first timefirst-time house buyers is not to get pressured into buying a property.  This will be your single largest purchase in your entire lifetime and you do not want to be pressured, coerced or forced to buy your first home just because all your friends or relatives have already done so. 

If you are not ready to buy your first home, just continue renting or staying with your parents/ relatives home.  For those who are renting, do make sure that your rental rates are lower than the equivalent cost of a housing loan to purchase the same property.  Else, you are better off buying the said property, right? 

Your current rental should always be a steep discount to owning the same property so that you can use the savings as funds to acquire your dream home in the future. 

‘Old can be Gold’ 

One of the biggest mistakes that first-time house buyers make is that they want a brand-new property.  However, the problem is that property developers keep on increasing their prices and aspiring house buyers either overspend on their purchase and get into financial difficulty in the future or they buy something much further or much smaller and they later regret because the commute time is too long or when they have children and there is just not enough space in the property. 

Our other piece of advice to aspiring first-time house buyers is that “old can be gold” and to ask aspiring first time house buyers to also consider existing completed properties. There are benefits of buying existing completed properties or secondary properties such as “what you see is what you get”. 

You can see the actual property and the surrounding neighborhood and decide if you like it.  In contrast, buying brand-new properties means relying on just the “artist impression” from Developers which upon completion sometimes not even close to the “artist impression”. 

Also, existing properties are already renovated so if you like it, you don’t need to do anything more.  Just move your stuff in.  However, for new properties, the first-time house buyer needs to spend a lot to get it up and running before being able to move in. 

However, buying secondary properties also requires the buyer to conduct some due diligence such as properly inspecting the condition of the property and ensuring that you are dealing with the actual owner of the said property. 

In conclusion, buying a property is not a simple process. It will be your most expensive purchase and you will be tied to a long-term housing loan.  There are severe legal and financial consequences if you cannot meet your loan obligations including being declared bankrupt.   

Aspiring first time house buyers must understand all their financial and legal obligations before making the purchase and as the saying goes “Look Before You Leap” and sign the dotted lines for your dream property. 

Avoid the stigma of being declared a ‘Bankrupt’. Bankruptcy does not release you from all your debts but will restrict you of your ability to travel overseas. It can, obviously affect your ability to obtain future credits. 

This article is jointly written by Sharifah binti Razali (a concerned citizen) and Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-Government, non-political and not-for-profit Organisation manned wholly by volunteers.

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