This is a common dilemma for millennials, especially if you are working in the Klang Valley but are originally from out-of-town.
Most of you believe that a property will appreciate in value while a car will depreciate in value over the long-term.
With that said, depending on the nature of your job, background, and financial status, you may consider a car first over property.
Here’s a simple method to buy both in the shortest time possible. The best part is: You do not need to sacrifice one for another. You must first understand the concept of ‘Debt Service Ratio’.
What is debt service ratio (DSR)?
Let’s say you earn RM3,000 a month. If local banks adopt a lending policy which limits their lending to where your instalments are capped to a maximum of 60% of your monthly income, then, the maximum amount of instalment you can afford is RM1,584 a month.
Your maximum monthly instalments
• Your net monthly income (after EPF, tax and Socso deductions) x DSR
• (RM3,000 – [let’s assume, 12% of your income]) x 60%
• (RM3,000 – RM360) x 60%
• RM2,640 x 60%
The instalments are a combination of multiple loans which include mortgage, car loan, personal loan, credit card debt and PTPTN.
If you choose:
Option 1: Buy a car first
Let us assume that you intend to buy a Honda City. The price of your preferred model is RM 90,000.
The nominal interest rate is 3% per year, hence, your monthly instalment works out to be RM953 a month based on a loan tenure of nine years.
If you opt for it, you will use up RM953 out of the available RM1,583 in monthly instalments on your car. This leaves you a balance of RM631 which can be used to service a mortgage.
Based on the Rule of 200, the maximum amount of mortgage you are eligible to obtain is RM126,200. Hence, you can shop for a flat or apartment that is priced anywhere below RM140,000, assuming that it is your first property.
Your maximum mortgage eligibility after purchasing your car
• (RM1,584 – car instalment) x 200
• (RM1,584 – RM953) x 200
Option 2: Buy a property first
You can buy a house first. Based on the Rule of 200, the amount of loan you are eligible to qualify is estimated to be:
Your maximum mortgage eligibility without purchasing a Honda City
• RM1,584 x 200
Let us assume that instead of using the RM953 for a Honda City, you choose to buy an apartment where your instalment is RM953 a month.
Your loan amounts to RM190,600. Your apartment should cost around RM210,000 if you are able to secure 90% home financing from local banks.
Your apartment price if your mortgage instalment is RM953 a month
• (RM953 x 200) / 90% financing
• RM190,600 / 0.9
• RM211,778 (estimated)
Hence, the advantage of buying a house first is that you will be able to buy a higher-priced property, having more options to choose from in the market presently.
What if you rent out your apartment?
If you opt for this, you will use up RM953 out of the available RM1,583 in monthly instalments on your apartment.
This leaves you a balance of RM631 which can be used to buy a car. It is good enough for a Perodua Axia.
Here’s a magic trick.
If you rent out your apartment for RM800 a month, you will boost your net monthly income to RM3,340 after deductions of EPF, tax, and Socso.
Your new net monthly income
• Your net monthly income (after EPF, tax and Socso deductions) + rent
• (RM3,000 – [let’s assume, 12% of your income]) + RM800
• (RM3,000 – RM 360) + RM800
• RM 2640 + RM800
Thus, you raise your maximum monthly instalments to RM2,064 from an initial of RM1,584. After netting off your mortgage instalments of RM953, your maximum amount of monthly instalments after letting your apartment out works out to be RM1,111.
Your maximum monthly instalments after letting your apartment
• (Your new net monthly income x DSR) – mortgage
• (RM3,440 x 60%) – RM953
• RM2,064 – RM953
The amount exceeds the instalment for a Honda City of RM953 per month. As such, like magic, you are still able to buy a Honda City after investing in an apartment.
Thus, if you wish to buy both a car and a house, one of the more efficient ways is to first buy a house, then buy a car. There are many who have applied this method and become wealthier.
This article first appeared in kclau.com