Making a down payment is a huge commitment for anyone. It is an exciting time for a family. However, the legal implications of making a down payment may be confusing. Therefore, we have to understand every step in making a home purchase.
This is a handy guide for you to understand the 5 important things to expect when making a down payment in Malaysia. Understanding the financial element of making a property purchase can save you a lot of trouble in the future.
What is a Down Payment?
Why should you make a down payment? A down payment is a sum required by the vendor or the developer for the purchaser to make upfront. The purchasers have to pay 10% of the total purchase price as the down payment. That means you will be required to pay at least RM50,000 as the down payment for a property which is worth RM500,000.
How about the remaining 90% of the property purchase price? The remaining amount, it can be paid using a home loan. In the event that you are unable to complete the payment of the full purchase price, the down payment that you have paid may be forfeited.
#1 Thing To Expect When Making A Down payment In Malaysia: Down Payment Amount
Down payment amount varies in different cases due to the vendors’ and purchasers’ considerations. The minimum down payment is 10% of the total property purchase price, but there is no limit on the maximum down payment that can be paid.
You may ask why a buyer wants to pay more for their down payment when purchasing a property. Paying more in down payment means less loan is needed. Therefore, the buyers can reduce the loan interest that they have to pay to the financial institution.
#2 Thing To Expect When Making A Down payment In Malaysia: Deposit and Down Payment is Not Entirely the Same
Many people think that a deposit and a down payment are the same. At first glance, they have many similarities. However, a deposit and a down payment should not be confused as one. Put simply, a deposit is only a part of the total down payment amount.
For instance, you are purchasing a property worth RM 1 million. The earnest deposit of the property is usually 2 % of the total purchase price, which is RM 200,000 in this case. The exact rate of the earnest deposit will be stipulated in the agreement.
The earnest deposit is not refundable in the event that you decide to not proceed with purchasing the property. Therefore, the earnest deposit is paid when you sign the Letter of Offer.
It is important to pay the earnest deposit to a reputable agency to prevent the amount to be forfeited without a proper reason. The earnest deposit that you have paid is a part of the down payment. The remaining amount of the down payment will be paid when you sign the Sale and Purchase Agreement (SPA). Once you have signed the SPA, the purchase is completed.
#3 Thing To Expect When Making A Down payment In Malaysia: Why is A Down Payment Important?
Many developers require the buyers to make a down payment in order to secure the sale. The agreement will usually stipulate that if the buyer is not able to finalize the sale, the down payment will not be refunded.
The down payment amount will be subtracted from the total amount owed to the vendor. Hence, the more that you pay for the down payment, the less the loan will cost. By paying more down payment, you are able to save the interest rate that is charged by the bank.
Let’s say that you want to buy a property which is worth RM300,000. And you pay a down payment of 10% of the total purchase price. You apply for a loan for the remaining 90% of the property. If the interest rate is 4% for a tenure of 35 years, you would have to pay RM232,107, just for the interest to the bank!
Therefore, you have to pay RM502,107 for the property purchase price of RM300,000 due to the interest. If you did not pay the 10% down payment, you will have to pay RM25,789 more in interest to the bank. Thus, the rule of thumb is that the more the down payment, the less the interest rate.
#4 Thing To Expect When Making A Down payment In Malaysia: What Are The Schemes Offering Down Payment Assistance?
Now you know that deposit is important in bringing down the interest that you have to pay to the bank. So what are the schemes available to assist you in making the down payment?
Fund for Affordable Homes is a scheme by Bank Negara Malaysia which support low-income groups to pay for their down payment. My First Home Scheme is specifically for adults below the age of 35 to buy their first home without paying a deposit. Rumah Selangorku 2.0 is only available in Selangor. The scheme aims to assist purchasers to pay for the down payment of affordable homes in Selangor.
#5 Thing To Expect When Making A Down payment In Malaysia: Tips to Save For a Down Payment
For most people, saving a 10% down payment is a large amount of cash. However, with the following tips in mind, saving up for a down payment will be easier.
To begin with, you have to plan and know how much you need. You should research the property that you prefer, and calculate the total down payment that you need to pay. You should also consider the costs other than the down payment such as the legal fees and stamp duty fees.
Next, you have to cut your spending to ensure that you are not shocked when you are required to start paying for the monthly instalment. If you find that saving more is not enough, you should consider finding ways to generate more income by freelancing jobs or selling homemade goods.
Bottomline: A Down Payment Is Just One Part Of Your Financing!
You must keep in mind that a down payment is only a part of the cost that you need to pay in order to purchase a property. Therefore, you must ensure that you know the full cost of purchasing a property before making the decision. You can get an estimation of a property cost by contacting a reputable property agency near you!
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