Tips on saving for your downpayment for first-time property buyers

Purchasing your first home is a step that requires long-term financial planning. Property purchases, like many other larger purchases that require a loan or mortgage, will require a down payment. The bigger the down payment you put down, the more money you save in the long run. Saving up so much money for a down payment may seem like a huge hurdle, but it is not unattainable. The key here is to save for your down payment the smart way.

In today’s guide, I’ll be sharing some information to help you in your financial journey.

1. How much should your down payment be

Conventional housing loans or home mortgages requires the buyer to have a down payment of at least 10 percent of the purchase price. Ideally however, you should have a down payment of 20 percent ready in order to secure the lowest possible interest rate and also have equity in your new property right from the start. This however, can be a daunting task. For instance, with a Denai Alam house for sale priced at RM600,000, you are looking at coming up with RM120,000 just for the down payment. What’s more is that this amount is not inclusive of other expenses related to the process and procedures of buying a house, such as stamp duty, legal fees, house valuation fees, etc. 

Sticking to this 20 percent rule should be your main goal. However, you don’t necessarily have to let this 20 percent rule be the factor that’s keeping you back from owning a home. Analyse each situation well and weigh them on their own merit. That is, make the best decision you possibly can based on both short- and long-term plans and issues.

2. Figure out how much you need to save

Before you even begin saving for a down payment on a house, you will need first know how much exactly it is that you need to save. Survey the types of houses you are interested in (and that you can afford)to get a gauge of the estimated purchase price. For instance, let’s say a prospective house you are looking at costs RM400,000. If you want to put down a 20 percent down payment, this will come up to RM80,000 for your down payment. However, a general rule is that your housing expense should not exceed 28% of your stable monthly income. 

You will also need to do some financial planning to see how much of a housing loan you can quality for. Banks in Malaysia typically use a Debt Service Ratio (DSR) to calculate your eligibility of loan. Your DSR will be derived from 2 main components: (i) income, (ii) existing debts and commitments. (Formula: DSR (%) = commitments (new & existing) / income x 100). Different banks will have different tariffs depending on your level of income and the DSR percentage the fluctuate according to the banks preferences. For example, RHB Bank might consider an 80% DSR, while HSBC Bank might allow a 70% DSR.

Don’t get hung up on these numbers and calculations. Bear in mind that they are just rough estimates of your maximum borrowing ability for housing loans. You need to know this in order to determine the range of purchase price that is within your affordability. You can use online Housing Loan Eligibility Calculators to save you some trouble if you’re not as number-savvy.

With some knowledge on current prices in the real estate market and some financial knowledge, you can get a rough idea of how much you will qualify for in housing loans, how much you will need to save, and how much you can comfortably save. It is also a good idea to add 10-20% up from that amount, as having more money saved will not hurt you in the long run, but having less certainly will.

3. Have a savings plan

Your down payment needs to come from a source of cash savings, which typically will be from your main source of income. You will thus need to figure out the amount that you can comfortably save from your income each month. This will then help you determine and calculate how long it will take for you to obtain the full amount that you need for a down payment, and when you can start house-shopping.

Let’s say your prospective house costs RM400,000, a 20% down payment of that would be RM80,000. If you plan on purchasing a home in four years, you will need to be prepared to save about RM1700 per month. If you keep to the 20% rule but want to shorten your time frame, your annual savings goal will be higher. If you decide to put down a 10 percent down payment instead, it would take half the time needed. Whatever the amount, you will need to set aside this amount from your monthly budget.

If you set your savings rate of your down payment fund as somewhere around 28-30% of your monthly income, you would need to have a monthly income of RM5,700 to be able to save RM1,700 a month comfortably. However, this does not take into account your other financial commitments, as well as other savings plans that you may have. Thus, remember to be realistic with your prospective purchases and live within your means.

Do take into account that housing prices will rise higher and higher, as these leveraged assets tend to rise with inflation rates. This means that a RM400,000 house you are looking at now will definitely not be the same price after 3 years. So, take these adjustments into account and plan ahead for these types of purchases. Buying a house is a long-term commitment and is surely not something that you can decide according to your whims and fancies of the moment.

You can figure out a rough time frame by playing around with various percentages of down payment, or vice versa, and calculate how much these different scenarios would affect the amount of your monthly payments. Once you have a plan you are comfortable with, adjust your monthly savings or your time frame as needed. It is very important to have a plan and remember to stick to the plan.

4. Exploit your windfalls

As with any financial plan, you will certainly experience periodic windfalls such as income-tax refunds, salary bonuses, gifts, etc. You can take advantage of these extra and unexpected windfalls by depositing them to your down payment fund. This can make the process of saving money for your down payment much easier, or even significantly shorter. 

5. Speed up the process

If you are the type that does not want to go the normal route of just slowly adding money to your savings account, you can think of better investments to speed up the process. Think about it this way, the money you deposit into a regular savings account is subjected to very low interest rates and this obviously won’t help you in reaching your savings goal faster.One way to speed up the savings process is to get better returns on the money you are saving. This would mean that you don’t have to save quite as much to reach your goal amount, because your money will be doing the work and earning more money for you concurrently while you are saving.

You can look into fixed deposit, as these types of accounts offer higher interest rates. Although you will have less flexibility and liquidity with these accounts, the principal protection and potential yields will be much more attractive when compared to typical savings accounts.

You can also check out methods of investment that offer much higher returns than regular bank accounts, such as mutual funds or unit trusts. However, as with any method of investment, there will always be an element of risk. Therefore, remember that there is no guarantee of any income distribution, returns or capital appreciation for these types of investment pools.

As a rule, you should not save money in high risk investment vehicles (such as stocks, investment trusts, etc.) if the money you are saving has a definite purpose. Although the returns are much higher, there is a real risk that you will lose your savings. However, if you do choose to take this riskier gamble, you will need to find ways to diversify your holdings in order to reduce your risk of losses. You should also hang on to the investment, bear in mind that you will experience ups and downs in the market. A handy tip is to give yourself a safety net of sorts by limiting yourself to investing only about 25% of the whole amount that you’re saving. This way, if the stock market experiences a downturn, the majority of your savings will be protected. 

6. Make room in your budget and build flexibility

Saving for a down payment on a house is much more than your normal savings routine. You will be looking at saving several thousands of Ringgit per year. This would mean that you have to clear some room in your normal budget to ensure that your savings goal is attainable. You may have considered earning additional income, or cutting back on expenses. Thus, make some room for leeway in your budget in order to prepare yourself for managing the type of tighter budget that homeownership requires.