Updated: May 19, 2020
You're ready to fulfil the great dream of most societies - to own your own home.
It may sound as simple as finding and buying one that you like but in reality it is a far more complex process that can potentially cause you a lot of heartache.
Imagine losing your 3% earnest deposit because you failed to obtain a mortgage. 3% on a RM800,000 home is RM24,000.
That rarely happens you say? Oh no, it happens more often than you think.
And that's just one possible cause of heartache. There are many others.
This comprehensive guide will walk you through every step of the process and save you from the heartaches. It is meant to be the only guide you'll need to buy a house.
Let's get started shall we?
#1 Preparing Yourself Financially
Before anything else, this is where you should start.
Your house should not be a source of financial burden. You also don't want to be in a situation where you have to abort halfway through the process of buying because you can't afford it.
You must be able to answer some very pertinent questions before hand:
How much can you afford to pay in monthly instalments?
How much can the house cost with this monthly instalment?
How much will you need in downpayment and other closing costs?
What's the plan to save up for these costs?
In short, you must know your cashflow in detail.
You can use the property investment spreadsheet that's available for free download with my book to answer the 2nd and 3rd questions above. There are some online mortgage calculators that can also help you answer these questions.
The final question above, is important. You always want to have savings. Using up all of your savings to buy a house is not the best of ideas. You should at least have a plan to replenish savings that have been utilised for the house. Ideally, you should have a fund separate from your savings for the purchase.
We'll go into some illustrations now. I've used my property investment spreadsheet to calculate all the figures in the illustrations.
Let's assume you have a net salary (after tax and statutory deductions) of RM12,000. Let's also assume your spouse has a net salary of RM8,000 and that both of you share the household expenses. This is what your monthly expenditure looks like:
Rent - RM2,500
Utilities - RM300
Internet - RM150
Car Hire Purchase - RM2,500 (for 2 cars)
Petrol - RM800 (for 2 cars)
Netflix - RM45
Children's Expenses - RM2,800
Food & Groceries - RM2,500
Entertainment & Hobbies - RM2,000
Miscellaneous - RM2,000
You're a financially smart person and pay the outstanding on your credit cards in full at the end of every month, so there are no credit card interest debts for you to service. Your total monthly expenditure is therefore RM15,595.
You have a monthly surplus of RM4,405.
But you also put aside 10% of your combined income as savings, which leaves you with RM2,405 (RM4,405 - RM2,000) in disposable income.
Based on this, you may think that you can only afford mortgage repayments of RM2,405 per month but that's not completely true.
If you're buying-to-stay, you won't have to pay rent after moving into your own house. So you can add the rent money to your disposable income, which would give you RM4,905.
If you're buying-to-rent (an investment) then you can afford a property where the monthly mortgage repayment is RM2,405. In reality, you will pay much less or nothing if your rent covers you mortgage repayments and costs.
Now that you know how much you can afford in monthly instalments, you can derive the price of the property you can purchase.
Let's say you can go for a 90% mortgage, the bank interest rate is 4.5% per annum and you're eligible for a 30-year duration.
If you're buying-to-stay, your monthly mortgage payments cannot exceed RM4,905. You can therefore buy a property with a price tag of up to RM1,075,000.
If you're buying to let, then your mortgage payments cannot exceed RM2,405. You can in this instance buy a property that costs up to RM527,000.
It doesn't end there. You need to know what your closing costs are. Closing costs are costs related to transferring the property to your name and include legal fees, stamp duties, and valuation fees.
You also have renovation costs.
Closing costs for a RM527,000 property would come up to about RM26,000. If renovations cost you a further RM60,000, you would need to have RM86,000 in addition to the 10% downpayment amounting to RM52,700. You must therefore have a total cash equivalent of RM138,700.
If you don't have it, you can look for a lower priced property or put in place a plan to save the amount over a period of time.
If you can fork out this money immediately, you can start shopping for property in that price range.
Now let's look at what it takes to get a mortgage.
#2 Getting a Mortgage
You're probably not going to purchase your property with your own cash. You'll need to get a mortgage from a bank. Even if you could purchase it with your own cash, most times it is better to leverage with the banks.
So before you go out looking for the house you think you can afford, you will want to check if the banks also think you can afford it. The approval process for a mortgage is complex but there are a few ways you can gauge your eligibility.
First know your debt-service-ratio (DSR). This is a measure of your ability to service your debts. Banks only look at your debts from financial institutions in calculating this. They don't look at your household expenses and entertainment expenses for example.
The formula to calculate DRS is simple. It is:
Total Monthly Debt Repayments / Net Income
If you take the same example above on your monthly expenditure, the bank would only consider the following for DSR calculation:
Car Hire Purchase - RM2,500 (for 2 cars)
Other items like rent, utilities, food, internet and Netflix are not debts with financial institutions and therefore not part of the equation.
Now, if you're applying for the loan under your name only, then the bank would only look at the hire purchase under your name and not the one under your spouse's name. Let's assume the hire purchase under your name requires a monthly payment of RM1,500.
Therefore, the bank will calculate your DSR as follows:
(Car Hire Purchase + Future Mortgage Repayments) / Net Income
(RM1,500 + RM4,905) / RM12,000
As long as your DSR is below 70%, you are in the safe zone. In this case, you are eligible for a mortgage where your monthly repayments are RM4,905.
Once you know your DSR is good with the banks, you should also check your CCRIS and CTOS records. As long as you've been paying all your bills and loans on time, you have nothing to worry about. But if you've been delinquent in credit card repayments or even your internet bills, you could find your mortgage application rejected.
If your CTOS and CCRIS records are squeaky clean, you have a good chance of getting a mortgage.
For more details on the DSR calculation and bank approval criteria, you can read my book, The Ultimate Guide to Buying Property, which is available for download at no cost. You'll also get a calculator that will do the DSR calculations for you.
Many bankers or mortgage consultants will help you do a pre-screening. They can look at your income, debt obligations, CCRIS and CTOS records and tell you if your chances for qualifying for a mortgage are good.
Moving on, how do you choose a house?
#3 Criteria for the Right House
Your considerations would be different if you're buying-to-stay or buying-to-let. In the former scenario, convenience would be the primary objective. In the latter instance, ROI would be your primary objective.
Make no mistake, they don't necessarily exist together. For instance, if you have 5 children, a 780sf 2-bedroom apartment is not a good option even if that particular size gives much better returns.
If you're buying-to-let, it's not so much about convenience for you. Even if the property is far from you, if it can give good returns and you have the resources to manage it from a distance, it is a good investment. You want to maximise your ROI.
What is good ROI? There are 2 fundamental measurements for your property's returns - capital appreciation and cash flow. Good ROI ideally maximises both. This means a property with the following characteristics:
above average appreciation,
high rental yield,
low vacancy (easy to secure tenants),
above average maintenance (for stratified properties),
superior tax benefits
To understand the choice you need to make in a buy-to-stay and buy-to-let situation, think of your options on a scale of 1 to 10. On one end of the scale (1) you have "maximum convenience" on the other end of the scale (10) you have "maximum ROI".
When you're buying-to-stay, you want a balance between both. So, you would be trying to get to the mid-point of the scale.
When you're buying-to-let, you want to to go all the way to the end of the scale at maximum ROI.
How do you know whether a property will give you maximum ROI? You'll need to do your research on the neighbourhood and make comparisons with other similar properties there. It is a very big purchase. You should devote a significant amount of time to research. My book, which you can download here covers this in more detail.
Onwards now to getting the house...
#4 Finding the Right House
This is the fun part. You know what you can afford, you know you're eligible for a mortgage, and you've settled on the criteria for the house. You can now start the search.
There are various ways to search for the right house. You can drive through the neighbourhoods that you've identified in your research and look for houses for sale, you can speak to agents you know well, or you can search on one of the online property portals. The later is the most popular search medium.
My favourite search portal is iProperty.com.my. They have the largest database of properties for sale, plenty of resources to help you with your search, and a robust search engine. The only downside to iProperty and the other property search portals is duplicate listings and fake listings.
A good number of negotiators or agents use photos and descriptions that are different from the actual listings they have for sale. So you may call to inquire about a certain property you saw advertised only to be told that the property is no longer available but there's another one available which is more expensive or less beautiful. It's an unprofessional method of click baiting.
That aside, iProperty.com.my can help you zoom into the exact type of house you're looking for and save you a lot of time. You can search based on a particular area or neighbourhood or even zoom into a particular development. You can also input your minimum and maximum price, number of bedrooms, and built-up size to ensure the search is within your required parameters.
Take your time with the search. Shortlist at least 10 properties. Go view them and ask lots of questions. Look out for leaks and defects. Don't be shy to speak to the neighbours. Walk around the neighbourhood. Go back to the neighbourhood on your own at night or early in the morning to get different perspectives. Get a thorough feel for the place.
View properties you've shortlisted at least twice.
Work with agents and negotiators who make you comfortable. The good ones are very proactive, will answer all your questions and will be happy to arrange multiple viewings for you.
When you're really convinced, make a reasonable offer.
When I was a Real Estate Negotiator, I had once sold a fancy apartment in Mont Kiara for RM3.2 million. Before the buyer signed the sales and purchase agreement (SPA), he viewed the property 4 times. On the 4th viewing, he brought a plumber, an electrician, and a general contractor to inspect the property.
Only after confirming that there were no leaks and serious defects did he proceed with completing the sale. This is exactly what every buyer should do before buying a house. You can't do this with houses you buy off-the-plan but those properties usually come with warranties.
For a list of what can go wrong when you buy from a developer, I have written just the post for you here.
If you've found that perfect house, it's time to go the next step.
#5 Offer to Purchase
Once you've decided on the house that you're going to buy, you'll need to make what's called and "offer to purchase (OTP)". This is a contract that specifies your intention to buy the house at a specific price. Usually this price is already verbally agreed upon by you and the seller (vendor).
You will pay an earnest deposit with the OTP. The earnest deposit is usually 3% if you're buying a sub-sale property. If you're buying the house directly from the developer, the earnest deposit is also called a booking fee and is usually much lower.
The OTP will also contain other specific conditions to the purchase. For example, you may say that the house must be sold fully-furnished with the items included in an inventory list attached to the OTP.
Your offer may also be conditional on getting a mortgage from the banks. This is a very important clause that you should include. If your offer is not conditional on getting a mortgage, the earnest deposit can be forfeited by the vendor in the event that you do not complete the sale.
Ensure the OTP always specifies whatever agreement you and the vendor have made verbally. For example, the vendor may have agreed to sell the house to you with a rare carpet included. Put that down in the OTP.
The OTP is also time-bound. This means it may be valid for 14 or 21 days. It is advantageous for you to have the OTP valid for 21 days. This gives you enough time to comfortably secure your mortgage before proceeding to sign the SPA.
If you fail to execute the SPA within 21 days, the vendor usually has the right to forfeit the earnest deposit, unless a conditional clause has not been fulfilled.
Once you've issued the OTP and it is accepted by the vendor with her signature, the OTP becomes a valid contract. Either party can't pull out of the sale unless there has been a breach to the conditions or a conditional clause cannot be fulfilled (not getting a mortgage for example).
This leads us to...
#6 The Sales & Purchase Agreement
If you've had a banker or mortgage consultant look at your finances like mentioned in Step 2 above, you should be sitting pretty for a mortgage. Problems can still happen when you actually apply for the mortgage. There is no guarantee you'll get a mortgage even if you were cleared during the pre-screening.
The banks actual scoring system takes into account many other factors.
One of my clients was told that her finances were in perfect order for a mortgage to the tune of nearly RM 1 million. However, when she went through the actual application, the bank told her that she would have to reduce her credit card debt significantly before they approved her mortgage. She did that and was given an approval.
Pre-screening may not guarantee a mortgage approval from the bank, but it sure as hell is a very good indicator of your eligibility for a mortgage. You should therefore always do it.
Now assuming, you did the pre-screening and you're fairly confident of getting a mortgage for your purchase, you can immediately proceed with applying for it after the OTP is executed by you and the vendor.
The bank will need this document to proceed with your mortgage approval. Although the approval process is supposed to be fast, it can sometimes take up to 3 weeks for you to get it. Missing documents, requests for more supporting documents or other problems can extend the timeline for approval. Keep this in mind.
Once the bank has approved your mortgage and gives you an offer letter, you can proceed to sign the SPA. You will need a lawyer for this. Ensure you get a good lawyer to draft the SPA for you.
Do not wait until your mortgage is approved before you start looking for a lawyer to draft the SPA for you. Remember, the OTP is time-bound so time is of the essence. After signing the OTP, you should already be interviewing potential lawyers to represent you.
The worst way to find a lawyer is to rush into one after your mortgage is approved and you have 3 more days to sign the SPA before the OTP expires.
The legal fees for drafting the SPA and perfecting it is based on a scale. The property investment calculator that comes with my book can estimate the legal fees for you with decent accuracy. Many lawyers can offer discounts but will not tell you. Check if your lawyer will give you one.
Never use the same lawyer as the vendor. You may be advised to do this but it is a bad idea. I have handled a case where the buyer was unrepresented and when a dispute arose later, things got very messy.
You really want to have good representation by a lawyer who has got your interests only to look after. Let's face it, a lawyer cannot really take care of your interests and the vendor's interests impartially.
When you buy a house directly from the developer, they would already have a standard SPA drafted by their lawyers. All residential properties fall under the Housing Developers Act (HDA). The act specifies all the clauses that must be included in the SPA.
Most buyers therefore opt not to be represented when they buy from the developer. Still, read the SPA thoroughly or better yet, get a lawyer to look at it for you.
Immediately after your mortgage is approved, you can sign the SPA if you're buying from a developer.
If you're buying a sub-sale house, you can ask your lawyer to proceed with preparing the SPA. Your lawyer will draft the SPA based on the OTP. If the house is sold fully-furnished for example, your lawyer will include the complete inventory list in the SPA.
The vendor's lawyer will also vet the draft SPA and when everything is in order, you will sign the SPA before the vendor does.
When you sign the SPA, you will have to pay the difference between your approved mortgage amount and the agreed purchase price. This is usually 10% of the purchase price if you have a mortgage for 90%.
If your mortgage is 80%, then you would have to pay 20% upon signing the SPA or at least 10% first and the balance 10% before your bank releases funds to the vendor. It is now a requirement by most banks that this difference is settled in full before they release the funds.
Also note, if you paid 3% as an earnest deposit with the OTP, you'll only pay another 7% when signing the SPA (if you have to pay 10%).
After the SPA is executed, your lawyer will have it stamped and will proceed to fulfil all other requirements for your name to be inserted into the title of the property as its new owner. There is a hefty duty to be paid for this name change called a Memorandum of Transfer (MoT).
The duty is charged on a scale and the property investment calculator that comes with my downloadable book will calculate this for you.
If the house you purchased is still under a master title, you have to wait for the individual title to be given by the land office and will not have to pay the MoT duty until this happens. This is usually the case when you buy a house from the developer. Because it is a brand new house, the land office would not have issued individual titles for the house as yet and it can be a couple of years before that happens.
There's one more important agreement you'll have to take care of after the SPA...
#7 The Loan Agreement (LA)
Before the bank releases your mortgage, you will have to sign an LA. The lawyer who prepares the LA for you must be on the panel of the mortgage bank. Usually the bank will give you a list of their panel lawyers for you to choose from.
Once you have chosen, this lawyer will prepare the LA for you. You will have to bear the cost of the preparation of this LA and the duty on the LA. Again, this cost is significant.
Only after the LA is executed and conditions met will the bank release the funds to you.
You will also be required to take insurance against the mortgage, usually referred to as MRTA or MLTA. MRTA is a lump sump payment that can be factored into the loan and is tied to the house you purchase. MLTA is an annual payment that can be transferred to the next property you buy.
There are variations to MRTA and MLTA that are specific to different insurers.
If you're pulling your hair at all these different steps towards the dream of owning a home, don't worry, we've come to the end...
#8 Vacant Possession (VP)
VP happens once all the legal documentations have been satisfied to recognise you as the new owner of the house.
If you bought a sub-sale house, you should be able to get vacant possession of the property anywhere between 3 to 4 months after signing the SPA. This is an average. It could be longer if there are complications. Freehold properties are usually faster compared to leasehold properties.
If you're a foreigner, there is foreigner consent to be obtained, which could extend the duration for VP.
If you bought a house off-the-plan, you'll have to wait until the house is built before you get VP. Depending on what stage of construction you bought the house in, this can range from a couple of months to 3 years.
After VP the house is legally yours. Congratulations!
I strongly recommend you read my book, The Ultimate Guide to Buying Property, to complement your reading. It is free and the the calculator that comes with it will help you calculate all the closing costs (stamp duties, legal fees, etc) associated with buying a house.
Now, start working on that dream house you've always wanted.