“HAIZZZZ, I regret buying my property. I was so impulsive.”
The above is a common comment I heard on property purchase. Buying a property is a common financial goal by many working adults. But, how many people bought their property with proper planning?
Therefore, this article is designed to help you to avoid a few costly mistakes when planning your property purchase. Here are three common mistakes you want to avoid:
Not knowing the purpose of buying property
It is important to define your goal before going into the process of getting a property because different property goals will require different planning and strategies.
One might end up buying the wrong property without a proper goal in mind. For example, the characteristic of a rental property is totally different from the one for one’s own stay. Property that is ideal for one’s own stay might not be ideal for investment purposes.
Buying a property is a long commitment. Some of the questions you can ask yourself to ensure you do not end up having regret in your decision include:
What is the purpose of your property purchase?
Is it for your own stay or for investment?
Do you prefer new or sub sale property?
If the property is for own stay,
Do you prefer high-rise or landed property?
Do you plan to set up a family in the near future?
If the property is for investment,
What is your investment strategy (is it for rental income/ to flip for profit)?
Do you have enough holding power (or emergency fund) during a market downturn?
Budget for house purchase
When setting budget/affordability for a property purchase, many focus only on monthly repayment. The actual fact is that there are many other property-related expenses besides just monthly repayment.
There are two types of expenses when it comes to purchasing a property:
- Lump sum payment
- Recurring payment
Lump sum payment refers to one-off payment such as down payment, agent fee, legal fee, stamp duty, valuation fee (for subsale), bank processing fee, renovation, etc.
Recurring payment refers to payment that will incur repeatedly. Examples of recurring payment are monthly instalments, maintenance fee, fire insurance, quit rent, assessment tax, and the Indah Water (sewerage) fee.
When looking at recurring payment – especially on house loan monthly instalments (for variable rate loan) – many forget to factor in the risk of interest rate fluctuation. For instance, the monthly repayment could be low and within one’s affordability in the current low interest environment.
But, one has to take into account the future upward revision of interest rate (this applies to loan interest rate and loan monthly repayment).
Therefore, it’s important to ensure that one has an ample budget to work around to cater for interest rate fluctuation. Failing to do so can result in one having financial difficulties, especially cash flow challenges in the future.
Do not understand options available for house loan insurance
Mortgage insurance is designed to pay off one’s outstanding loan when one is unable to do so due to unexpected events such as death, total permanent disability or critical illness crisis.
There are two types of house loan insurance:
- MRTA (Mortgage reducing term assurance)
- MLTA (Mortgage level term assurance)
Let’s use a RM500,000 house loan for illustration purposes.
MRTA coverage starts with RM500,000 with the coverage receding over time due to reduction of the loan value over a period of time. As for MLTA, the coverage stays at RM500,000 regardless of time.
Failing to understand the different types of house loan insurance available can cause financial burden to one’s family. For instance, MRTA is subject to fluctuation of interest rate. As such, family members might face unnecessary additional debt burden when actual outstanding debt is higher than projected outstanding loan due to increase of interest rate over years.
There are more details on the differences between MRTA and MLTA. It is not recommended to jump straight into either one without proper research.
In conclusion, when it comes to planning on property purchase, one needs to have a clear goal on buying property, adequate budget and proper risk management (insurance). Through proper planning, one will be able to make rational and cost effective decisions that will impact one’s financial trajectory over the years.
Kuah Soo Yee, CFP is a certified member of the Financial Planning Association of Malaysia (FPAM) and a licensed financial planner with IPPFA Sdn Bhd.
Article originally published in Focus Malaysia