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Is buying cheaper than renting a house?

Let’s say you have decided to buy an RM560,000 condominium unit in Casa Tropicana, Selangor. To commit, you will have to pay:

  • A 10% down payment upfront

  • A 4% closing cost (legal fees, stamp duty and valuation fees)

  • A 3% home insurance cost

  • Monthly instalments of roughly RM2,500. This is calculated based on the following terms: a 30-year loan tenure at 4.25% interest and a 10% down payment. *Note: The interest rates of current mortgage products vary between 4.0-4.5%, hence we will be taking the average which is 4.25%.

  • A RM250/month for maintenance costs

Meanwhile, if you rent the same unit, it will cost you RM2,100 per month. To commit, you will have to fork out: A deposit of RM5,750 (equivalent to 2.5 monthly rent)

This Buy Vs Rent Calculator assumes the following:

  • Property prices appreciate at 2% YoY.

  • Rental prices for similar properties appreciate at 2% YoY.

  • A 4.0% investment rate (the percentage of annual earnings from any money you save from purchasing by investing them in FD, stocks, bonds, etc)

After 8 years, your total cost of homeownership (down payment, housing loan, property taxes, etc.) for an RM565,000 home in Malaysia would be RM904,654. Renting leaves you with RM654,905 in your pocket (including money not spent on a down payment).

Property Gain: After 8 years, if you buy, your home will have RM233,423 in equity (available to you when you sell). However, if you instead rent and invest your downpayment and the other money saved, at a 4% return rate it will earn around RM30,974 in 8 years.

Looking at your gross costs, equity and investment potential, it will be better for you to buy than rent if you plan to live in your home for more than 8 years. Thus, we recommend that you only purchase a home that you are certain will suit you and your family’s needs for the longer term. Purchasers who plan to upgrade in 5 years or less have to keep RPGT in mind as well.

Do note that this is just one example. Property selling and rental prices could differ greatly by housing types, property age and across different locations. You should play around with the Buy vs Rent calculator to gauge if it makes sense to purchase your own piece of real estate now.

How to determine if you can afford to buy a house or not?

The best way to gauge your readiness to purchase is to calculate your Debt Service Ratio (DSR), the ratio of a person’s total debt to their monthly income. It determines whether you will be able to secure a mortgage in the first place.

Debt-to-service ratio Formula = Debt/Net Income X 100

A good DSR proves to the banks that you can afford to pay the monthly instalments throughout the loan tenure. Generally, banks will not accept a DSR which exceeds 70%.

Do take note that banks will refer to your Central Credit Reference Information System (CCRIS) report too when reviewing your home loan application. Your CCRIS, which is available online displays all of your total credits, interest charges and other outstanding charges for all loans that you have taken out with any banks in Malaysia – these include personal loans, credit card loans and hire purchase loans.

Delay in repaying any of your debt obligations will show up in your report, where it is labelled as “1”. Lending guidelines differ across banks, but most will require mainly zeroes as it shows that you are a good paymaster.

Do you have enough cash for the closing costs?

Buying a house requires making a number of payments at different phases. First, you have to fork out 10% of your purchase price as a deposit to lock in the property. Then, you have to pay the monthly loan instalments for the next 30 or 35 years.

Apart from that, there are also a number of fees you need to cover known as the closing costs. These amount to 3-5% of your real estate value and comprise expenses such as legal fees, agent fees, MRTA, valuation fees and stamp duties. Check out the 2023 Stamp duty, legal fees and 5 other costs when buying a house in Malaysia.

Besides that, first-time home buyers who are keen on capital growth will have to keep property tax in mind. If they sell their property within the first five years, the profit is subject to the Real Property Gains Tax (RPGT). The good news is, the Malaysian government had earlier announced that starting 1 January 2022, all Malaysian citizens and permanent residents will be exempted from RPGT when they sell their property after the fifth year.

If you determine that your DSR is within a healthy range and you have enough savings for a 10% down payment and the closing costs, you can then proceed to the next step. However, if you are already struggling with your financial obligations, it is best to put your home ownership dreams on hold and continue renting. In the meantime, you can work on improving your finances first using the 50-20-30 rule, a simple budgeting guide that is suitable for all income brackets.

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