My Money by TEE LIN SAY
Feb 12, 2011-extracted from starproperty.my
In today’s environment of rising home prices, is it more advantageous to buy a house or rent a house?
While most people unanimously agree that owning a home is better, the financial situation of the individual is important in assessing whether he or she can afford the home.
VPC Alliance (KL) Sdn Bhd managing director James Wong says it is always better to own a home. But one’s financial ability will play a big part in the choice of a house, he adds.
“Of course, it’s better to buy than rent as the loan you pay to the bank is equivalent to the rental you are forking out,” says the boss of the property consultant firm.
Young people are advised to look into their finances and ensure their existing debt ratios are not too high before buying a house. They also need to consider the stability of their jobs to ensure they will be able to make the monthly loan instalments, Wong says.
“If a person’s debt ratio in relation to his salary is already close to 50%, chances are banks will not qualify the loan. If a person’s salary is too low, meaning that the mortgage amount to be paid is more than 50% of a person’s salary, the bank may also hesitate and require more documentation to approve the loan.
“These days, with the easy payment packages by banks and the ability to withdraw from one’s Employees Provident Fund (EPF) savings, owning a house has become more affordable,” says Wong.
Certainly, potential house buyers can now tap on their EPF account 2 to purchase a property. First-time house buyers can still qualify for loans of up to 90%
During Budget 2011, the Government said it will introduce Skim Rumah Pertamaku through Cagamas Bhd, which will provide a guarantee on the downpayment of 10% for houses below RM220,000.
This scheme is for first-time house buyers with household income of less than RM3,000 per month. In other words, the buyers will obtain a 100% loan without having to pay the 10% downpayment.
First-time house buyers will also be given a stamp duty exemption of 50% on instruments of transfer on house prices not exceeding RM350,000. The Government also proposed that a stamp duty exemption of 50% be given on loan agreement instruments to finance such first-time purchase of houses.
“If you rent a home, especially in today’s environment of rising prices, you will never benefit from the increase of the property value. Furthermore, even if the value of the home does not increase over time, the mortgage balance decreases and equity builds,” says another property consultant.
“With the problem of inflation creeping up, the more you delay buying a house, the more expensive it becomes over time. Buying property is one way to fight inflation,” he adds.
In terms of disadvantages in owning a house, there are many variable costs involved, for example the house assessment, service or maintenance fees and fire insurance among others.
“Selling the house may also not be as quick as, say, selling your investments in shares. The whole process of selling, along with documentation by lawyers can take up to a year, depending on the location of the home. If there is already a potential house buyer, the process can be sped up to 3 months,” says the property consultant.
Khong & Jaafar managing director Elvin Fernandez gives a quantitative example between buying and renting a property.
If a typical middle class 2-storey terrace house in Kuala Lumpur is RM400,000 and the rent is RM1,500 a month, the nett yield is RM3.8%.
“This is a reasonable return from such a landed property,” he says.
Assuming that the household income is about RM7,000 a month, this means that the ratio of the household income per annum to the house price is 4.76 times.
“To buy this house based on 90% financing at a fixed interest loan for 30 years, you would have to pay a 5% interest, which means a monthly expense of about RM1,900 a month. At this point of the exercise, it is clearly better to rent than buy,” he elaborates.
Still, he adds: “This analysis is based on what I consider the typical housing unit. Different considerations may apply for different types of housing units in different areas.”
Another powerful motivation in favour of buying rather than renting is the social imperative to own a home.
“Owning a house also allows you to raise credit as and when it is needed, for family expenses and for business purposes, and this is a powerful motivation for ownership,” says Fernandez.