Coming to a decision on whether to rent or buy a home can be quite difficult. Aside from the obvious financial implications to consider, there are various factors to be taken into consideration. Here are some questions which we hope will help you come to the right decision.
Can I afford the upfront payment required to purchase a home?
Banks will provide financing for up to 90% of the property purchase price (i.e. margin of financing of 90%). Do you have sufficient savings to pay for the 10% deposit required upfront? Some would advice that you shouldn’t buy a home until you can afford a 20% down payment, but be wary of the opportunity cost (see below) involved in forking out a large down payment.
You should also be aware that there are other upfront costs involved in purchasing a property such as legal fees and stamp duty, plus other fees and disbursements. We estimate that you should add an additional 2.7% (for properties priced at RM100k) to 3.8% (for properties priced at RM1.5 mil) of the property purchase price on top of your deposit.
What about monthly costs?
Do measure your disposal income against your existing debt and expenses, and see where a monthly rental/ mortgage payment would fit in. You can compute the monthly instalment required for a mortgage using a home loan calculator. Here’s a good one on Calculator.com.my. Mortgage payments aside, owning a home can cost you more because of maintenance and improvements costs. As a homeowner, you will have a steady stream of fairly significant financial obligations that most renters will not have.
Ensure to leave a cushion for any emergency or unexpected situations. You don’t want to be overburden with monthly payments and squeezed for cash at the end of each month!
Tip: The current loan interest rate is at about 4.6%. Check out loanstreet’s compilation of loan packages from various banks here.
What is the opportunity cost associated with renting or buying?
You must consider the opportunity cost of each choice. Simply put:-
- If you rent, you pay a lower fixed amount each month but are missing out on owning an asset and any capital appreciation that may come with it.
- If you buy, the down payment and monthly instalments required could potentially be very large.
Could you have earned a better return by investing the down payment and/or the difference between rental and mortgage payment?
How long will I stay?
In general, the longer you plan to stay in your new home, the more it makes sense to buy. On the flip side, owning a home will require that you make a commitment to stay in one place for a while. If you like the freedom to be able to “pick up and go” at any time, then perhaps renting could be a better alternative for you.
Can I handle the maintenance work required?
Owning a home requires a lot more effort on maintenance than renting does. If you buy a property, you must be willing to put in the extra effort required to maintain it. If you’d prefer to let someone else worry about maintenance, you may be better of renting.
Monetary-wise, beyond simply making ends meet, you’d want to make sure you’re financially secure; don’t spend a fortune on buying a home if it means you’ll be living hand-to-mouth for many years. Of course, beyond the money factors, you’d also want to consider your individual wants, goals and milestones. Do take some time to mull over whether renting or buying a home is the right choice for you.