helo.my: “Can I afford to buy a RM500,000 home with a RM5,000 salary?” “What kind of income do I need to buy a RM700,000 property?” “How much should I spend on my mortgage?” You’ve probably asked yourself variations of these questions while dreaming about buying your first home; and realised that they’re not easy to answer. So, here’s your guide to estimating how much you can afford to spend on a home.
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The maximum home loan you can get depends on your debt service ratio (DSR). This refers to how much of your income is being used to service debt repayments. Banks use the DSR to gauge your ability to repay your home loan. If your DSR is too high, your bank may not approve your home loan application. Here’s how the DSR is calculated:
DSR = (Total monthly commitments ÷ net income) x 100%
[block]Example DSR calculation Total monthly commitments: RM700 car loan + RM200 PTPTN + RM200 credit card = RM1,100 Total net income: RM5,000 DSR = (RM1,100 ÷ RM5,000) x 100% = 22% [/block] Banks will only allow you to borrow up to a certain amount of your DSR (across all your commitments). This could be around 60% to 75%, but each bank will have different requirements. Here’s an example of how this works:
Your bank may have an online calculator that you can use to estimate your loan eligibility. However, each bank has different DSR requirements, and may have different ways of calculating your DSR, so it’s worth checking with multiple banks.
While your bank may lend you up to a certain amount, you may not want to take the biggest loan available. That’s because spending too much on a new home can strain your finances. It could make it harder for you to meet other financial commitments, such as day-to-day living expenses, saving for retirement or even putting funds towards that overseas trip you’ve always wanted. So how much should you spend on a home? The National House Buyers Association’s (HBA) suggests not exceeding one third (or 33.33%) of your DSR on a home loan. If you spend a third of your net salary (we’ll round that down to 30%), here’s how much you may need to earn to afford these properties, assuming you’re a first-time home buyer who can borrow up to 90% of the property value. [table id=1541 /]Assumptions: 10% down payment, 35-year tenure, 3.5% interest rate, buyer spends 30% of monthly salary on home loan However, the estimates above are just a general guideline. You may need to lower your expectations if you have many financial obligations. Some financial experts also suggest an alternate rule of thumb to gauge home affordability. The 28/36 rule suggests that you shouldn’t spend more than 28% of your gross monthly income on housing, and no more than 36% on debt obligations. The 28% includes spending on all housing expenses, which brings us to our next section…
Owning a home doesn’t just mean paying for a mortgage. You’ll also have to consider:
These additional costs can make homeownership a lot pricier. Before you commit to buying a home, it’s worth estimating how these costs will strain your budget.
In short, your maximum home loan depends on how much your bank is willing to lend you. A lower DSR will increase your chances of getting your home loan approved, as well as help you score a bigger home loan. But don’t take on the maximum home loan available if it means straining your finances. A general rule of thumb is to keep housing expenses below one third of your income, though you may need to adjust depending on your financial circumstances.