Getting Your Down Payment

They say that the first step is always the hardest. So, we at Property Insight decided to look at several ways you can accumulate your seed money 

Many agree that it’s a good time to shop at the secondary market with the current market being what it is. However, there are many things to consider when buying property from the secondary market, especially the down payment.

If you have worked for at least five years, you might have enough savings for your down payment. But how about the younger generation who just started working? There are so many ways to get seed money, from the mundane to the enterprising. Here, we take a closer look at a select few. 

GOVERNMENT SCHEMES

The Government has implemented a few schemes to help young adults buy their first home. Two of the well-known schemes are My First Home Scheme and MyDeposit.

My First Home Scheme (Skim Rumah Pertamaku) was first announced in the 2011 Budget to assist young adults who have just joined the workforce and earning not more than RM5,000 per month to own their first home. The scheme allows young adults to obtain 100% financing from financial institutions, enabling them to own their first home without the need to pay the 10% down payment.

The scheme is open to all Malaysian citizens aged 35 years old or less (age next birthday is 36 years old or less) with a gross income of not more than RM5,000 per month for single borrower and a gross income of not more than RM10,000 per month for joint borrowers (based on a gross maximum income of RM5,000 per month per borrower).

Point to ponder: Even if a young adult or fresh graduate qualifies for My First Home Scheme, how much would they need to earn before they can afford the monthly bank loan instalments? Even if a fresh graduate is paid an average of RM2,500 a month, depending on the job scope and academic qualifications, they may have a long list of debts to bear as well – i.e. student loans, car loans and credit cards.

MyDeposit, which was announced during the 2016 Budget last October, is aimed at helping the lower-middle income group with a household income of RM10,000 and below. The Government has allocated about RM200 million for the MyDeposit Scheme for first time house buyers.

You are eligible for MyDeposit if you are a Malaysian citizen who is 21 years old and above and is a the first time buyer in your household (meaning both you and your spouse have not bought property before). Your gross household income lies between RM3,000 and RM10,000 a month and you must be able to get financing from the banks.

The price of the property must be RM500,000 and below and it must be a sub-sale unit. You can only sell the property 10 years from the date stated on your Sale & Purchase Agreement (SPA). The property should not fall under any other category of government initiatives to encourage home ownership, such as 1Malaysia Civil Servants’ Housing Programme (PPA1M), 1Malaysia Housing Programme (PR1MA), People’s Housing Project (PPR), Federal Territory Affordable Home Project (Rumawip) and Rumah Mesra Rakyat.

Without doubt, this initiative benefits all Malaysians who have been planning to own their first home. With the down payment taken care of, home buyers can afford to buy a house without draining their cash reserves, and use their cash for future monthly loan repayments.

Point to ponder: It’s important to take note that the SPA must be signed within 30 days upon receiving approval from MyDeposit. So you need to get your bank loan approved before you can get your MyDeposit application approved.

MUTUAL FUNDS (UNIT TRUST FUNDS)

Investing in a mutual fund is one way to make money for a down payment. Kevin K.M. Neoh, a licensed financial planner from VKA Wealth Planners Sdn Bhd, says, “If you invest in stocks or REITs directly, you will have to buy it from the stock market. REITs is also a ‘stock’ listed on the stock exchange market. The difference between a REIT and any other stock is that the underlying of REITs is real property, and the income is derived from property management and assets that generate income.”

If you invest in stocks or REITs via a mutual fund, you will be buying into a fund that invests in the stock market, but is not limited to a single stock as a typical mutual fund invests in approximately 30-50 stocks. This gives the benefit of diversification to the investor as you are not ‘placing all your eggs in one basket’.

“Similarly, there is also a REITs fund whereby the fund will invest in multiple REITs. There is also regional REITs or regional stocks fund that allow the investor to diversify and avoid exposure to a single country. Unlike investing directly on the stock exchange, the fund manager has to buy back the unit from the investors when they want to sell, so you do not need to wait for a willing buyer when you want to sell your holdings,” he adds.

Neoh explains further, “Upon submitting your redemption request, typical mutual funds will have a waiting time of T+4 to T+7 depending on the funds. Investing in mutual funds will incur a front-end load (sales charge or subscription fee) that usually ranges from 2% to 7%. Apart from that, funds will also have a yearly management fee ranging from 1.5%-2%++ depending on the type of funds or the fund the manager selected. Therefore, it is highly recommended that investors read and understand the product highlight sheet or prospectus before deciding to part with their money.”

Point to Ponder: It is not advisable to invest in these instruments if you are trying to get your money back in a short duration, for example, within a year. This is because such investments are volatile, and you may lose your money as a result. It is also very important to understand your investor risk profile, risk capacity as well as investment time horizon before investing.

FIXED DEPOSITS, CASH MANAGEMENT FUNDS, MONEY MARKET FUNDS

According to Neoh, if one’s investment time frame is only one year or shorter, they should consider placing the money in fixed deposits, cash management funds (funds that invest in fixed deposits) or money market funds. Cash management and money market funds offer similar returns to fixed deposits, but it has daily liquidity. For example, if you withdraw this money after 20 days, you will still receive your ‘dividend’ for the 20-day period.

Neoh says, “Unlike a fixed deposit, if you redeem after 20 days, you will likely forfeit your interest. Cash management fund and money market fund will usually have zero sales charge, so it can be as good as a fixed deposit, with the additional benefit of daily liquidity. However, it will usually take T+2 days before the money is in your account; for fixed deposit, it is usually T+0.”

Bank Negara Malaysia (BNM) recently announced the reduction of the overnight policy rate (OPR) by 25 basis points to 3% at the Monetary Policy Committee (MPC) meeting on July 13, 2016. How will this affect you? With the 25 basis points reduction in borrowing rates, consumers will see a hike in their disposable income due to a reduction in interest payments. In other words, consumers will have more cash to spend, which will likely spur the domestic economy.

Point to Ponder: The fixed deposit rate is affected not just by the OPR movement. The fixed deposit rate may be slightly higher for a particular bank because they want to attract more funds. If the former goes up, the cash management fund rate will go up in tandem too. Therefore, if the interest rate decreases, putting money in fixed deposit may not give you a good return. You may want to keep the money in your savings account instead. 

EPF WITHDRAWAL

This scheme allows individuals (or joint purchasers) to withdraw money from their EPF Account 2 to purchase a house (type: bungalow / terrace / semi-detached / apartment / condominium / studio apartment / serviced apartment / townhouse / SOHO) or a shop lot with residential unit, from a developer, individual or in a public auction.

To apply, the SPA as well as the Housing Loan Approval Letter or Loan Facility Agreement must be submitted at the time of the application. According to Loanstreet, money from EPF Account 2 can be used to pay the price difference between the SPA house price and the housing loan amount, up to an additional 10% on the price of the house. So if a full housing loan (100%) is obtained, the maximum that can be withdrawn is up to 10% of the price of the house.

If the house was purchased using cash, up to 110% of the price of the house can be withdrawn. Any withdrawal amount is subject to whatever money that is available in the applicant’s (and where applicable, joint applicant’s) Account 2. As such, you can withdraw from Account 2 to purchase your first house, and withdraw to purchase a second house, provided the first house is sold, or disposal of the property has taken place.

Point to ponder: One of the terms for withdrawal is you have signed the SPA not more than three years from the application date. This means that you still need to pay the down payment using your own money first before you can apply for EPF withdrawal. Also, you need to consider how long you will need to work for before you have enough money in your Account 2 for that purpose.

WORK HARDER AND SPEND LESS

I met some young investors who managed to obtain their seed money from doing multiple jobs and spending less. One investor, Diau Mun Cheng, worked part-time as a tuition teacher and did home tutoring for six months before he managed to save up his seed money (Read his story on page 58). An Additional Mathematics teacher can earn between RM50 to RM65 per hour giving tuition.

How much you make depends on the type of part-time job that you do. Many young people are now driving Uber, GrabCar or running a part-time business on Instagram. And as with any job, the more time and effort you put in, the more money you make from it.

Nashruddin, who drives GrabCar as his full time job, makes an average of RM3,000. During those months when he puts in extra effort, he can make at least RM5,000 per month. As a part-time accessories seller on Instagram, Eda Mansur makes at least RM2,000 per month. In her first month alone, she made RM1,200.

Point to ponder: If you can spare the time and willing to make the effort, doing part-time jobs can be a good supplement to your monthly income. Depending on the type of part-time work you are doing, it may take less than a year for you to save up money for your down payment.

These are just some of the ways to obtain money for your down payment. It is by no means an exhaustive list as it goes back to the root of financial management – you. Are you willing to work a little harder for it? Or would you opt to take the easy way out?