Wednesday, May 18, 2016

What You Need To Know Before Buying A House

So a couple of weeks ago, I made a video about the preparations one has to go through before investing in property. You can check out the video here:

As I said in the video, there are a few things that we need to find out about before going on our journey towards purchasing property. 

One of the firsts steps on that journey for most of us is getting a loan from a bank in order to buy that house. Now, when we go to the bank, they won't just give is money willy-nilly. They take into consideration a few things, namely these four: your Debt Service Ratio, your risk profile, the price of the house you intend to buy, and you Loan-To-Value ratio. What we'll be discussing in this blogpost is the Debt Service Ratio, or DSR for short.

Whoa, that sounds highly technical! What does that mean?

DSRs are basically a percentage. Some people are have a 50% DSR, other people have 60% DSR. The percentage basically shows how likely or unlikely it is for you to be able to pay back your loan to the bank. The lower your DSR percentage, the better, as it shows that you have a higher chance of paying and lower chance of not paying your monthly repayments.

 But how do I know how much my DSR is?
Good question. I'll walk you through how I get to know my own DSR.

For convenience's sake, let's say that I get a monthly income of RM3000.

Firstly, I add up all my monthly payments that I have to make.
Rent (RM300) + Car repayment (RM550) + Phone Bill (RM100) = RM950

And then I add to that the amount of money I would have to pay every month if I were to purchase the house I want. Let's say that's RM1050. So,
RM950 + RM1050 = RM2000

Next, I divide that number with my monthly income.

RM2000 / RM3000 = 0.66

Finally, I multiply that number by 100 to get my DSR percentage.

0.66 x 100 = 66%

So that's my DSR if I wanted to buy a house that required me to pay RM1050 every month to the bank.

And that's it, really. To wrap it up:
1. Add up all your monthly commitments.
2. Add to that the amount you will pay every month for the house.
3. Divide that total with your monthly income.
4. Multiply by 100.
5. That's your DSR.

Remember, the lower your DSR is, the better your chances of getting a loan from the bank to buy your house. Aim for getting below 60% DSR, as lots of banks take that as the typical cut-off point.

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