Monday, 3 January 2005

Of buying a house

Ask newly married couples what they want as a wedding present, and chances are, some will jokingly say, a house. Jokingly, because they know that most likely they will not get it from you. They will say it anyway, because that’s what they need. So parents, instead of spending lavishly on the wedding, perhaps you might want to consider contributing towards the down payment for a new home for the young couple. If you can afford it, forget the idea of an extended family living under one roof, as it is bound to give more headaches than pleasures.

Now, the price of a decent house in Klang Valley is not exactly cheap for most of us young couples. When I say decent, I mean a standard 22 x 75 terrace house or a 1,000 sq. ft. apartment in an unpretentious neighbourhood. Forget neighbourhoods that are close to the city centre such as Bangsar or Damansara (perhaps I should define which part of Damansara, because Damansara seems to be expanding these days). The rule of thumb is, the further you are from the city centre, houses become more affordable, though I must say with extra effort and some luck, you can still find reasonable bargains in certain parts of KL.

For many people, the experience of buying a house is their first and only one, so they may not be aware of the costs involved apart from the purchase price of the house. I am not an expert on this either, but I’ll try to make a list of the expenses based on my experience. Since buying a house is a major financial commitment, I thought I should put a disclaimer before I proceed with the list:

This list is not intended to be a guide for house buyers. Neither is it presumed to present complete and accurate facts. I prefer to think of it as sharing of experience. Please consult the professionals if you need better information. Lastly, please do not sue me if you incur financial losses as a result of reliance on the information provided henceforth. If you do, it would be a complete waste of your time and money since all my assets are mortgaged to the banks.

That’s out of the way, let’s get down to the nitty-gritty without further ado. Here’s what’s likely to come out of your pocket in the next x years of your life if you decide to buy a house:

1. Purchase price of the house
But of course. If you don’t have sufficient cash, which is very likely if you’re average people like me, you may obtain loans. Do not feel bad because my estimate is that 95% of the Klang Valley residents buy their houses on loans. You may obtain housing loans from your employer, banks or some insurance companies. When I bought my house in 1999, the loans provided were only up to 90% of the purchase price, but nowadays, you can get loans for even more than 100% of the purchase price.

The loans available are either conventional or Islamic. Normal features of conventional loans are floating interest rates e.g. BLR + y% and no principal payment during construction period. So during the construction period, you only pay interest on the sum that has been disbursed by the bank. Payment of principal plus interest only commences after completion of the house. On the other hand, Islamic loan usually has fixed interest during the tenure of the loan. The monthly instalment payment of principal plus profit (think of it as interest) either commences after the first disbursement by the bank or after completion of the house. Having said that, nowadays banks are very creative with their loan products to attract (and confuse) customers, so there are many varieties from one bank to another. Examples of the new features are lower interest rates for the first and second year hence lower monthly instalment during this period, flexibility to pay higher monthly instalments when you have extra money eg. during bonus time hence you could pay off your loan faster, overdraft features hence ensuring your loans are never paid off, etc. So, shop around to find a loan product that is most palatable to your pocket.

Apart from the loans, another source of funds is your EPF Account II. 30% of your monthly EPF contribution (plus your employer’s) is allocated to this account. The EPF took 3 weeks to process and disburse my funds, which is a reasonable period, I think.

Though you may obtain the loans and withdraw from your EPF Account, it is reasonable to expect that you should have some money for the down payment of the house. This is usually 10% of the purchase price and payable on signing of the SPA. However, some developers may allow you to pay a lower amount first eg. RM5K and defer payment of the balance to a later date.

2. Stamp duty on Sales & Purchase Agreement (SPA)
The amount depends on the purchase price. The rates as staggered, eg. 1% on the first RM100K, 2% on the second RM400K, and so on. To illustrate, if you buy a house for RM300K, the stamp duty on the SPA is:
First RM100K at 1% RM1,000
Balance of RM200K at 2% RM4,000
Total stamp duty on the SPA RM5,000

This amount is payable to the SPA lawyer sometime during construction of the house.

3. Stamp duty on Loan Agreement
The amount depends on your loan amount. The rate is 0.5% of the loan amount. If you take a loan of 90% of the purchase price of RM300K, the stamp duty is as follows:
Loan amount RM270K
Stamp duty on Loan Agreement at 0.5% RM1,350

This amount is payable sometime (not long) after execution of the Loan Agreement

4. Legal fees on SPA
My developer subsidised this so I do not know how the amount is determined. I still had to pay about RM500 to the SPA lawyer though. Payment is also not long after execution of the SPA. I paid mine together with the stamp duty for the SPA.

5. Legal fees on Loan Agreement
The fee is 1% for the first RM100K of the loan and 0.5% for the remaining balance. Based on loan amount of RM270K, the fees should be:

Legal fees on first RM100K at 1% RM1,000
Legal fees on the balance of RM170K at 0.5% RM850
Total legal fees on Loan Agreement RM1,850

In addition to the above, you may have to pay for some charges which I think they call ‘disbursements’. My understanding is that this refers to photocopying expenses, travelling expenses, etc.

5. Mortgage Reducing Term Assurance (MRTA)
If you take a loan, the bank will normally require you to purchase the MRTA, which is a type of insurance. The MRTA premium is payable once at the inception of the policy. I have no idea how it is calculated but mine is about 3% of the loan amount. I suspect factors such as loan amount, loan tenure and your age come into play here. Some banks offer to include the MRTA premium into the loan amount. Some may not require MRTA if you already have sufficient life insurance coverage.

6. Deposits
As the house nears completion, you will be asked to pay the electricity deposit and water deposit.

7. Penalty for late payment
When the house is ready, the developer will notify you to collect the keys. They will only release the keys if you have settled all the amounts due to them, one of which is the penalty interest for late payments. This happens when you (or your bank) fail to pay the progress payments within the grace period (normally 14 days from the date of the bill). The delay is most likely to happen on the first disbursement from the bank, as the loan processing time can be quiet lengthy. Subsequent disbursements are normally made within the 14 days grace period. In the SPA, it is stated that the interest for late payments is 10% per annum. Regardless of whose fault it is (you can blame your bank, lawyer, Pejabat Tanah, the developer, etc.), at the end of the day, you still have to foot the bill, though some developers may give you a waiver.

We were reminded by our developer to follow up with the SPA lawyer and the Loan Agreement lawyer on the progress of the processes, as delays by both will result in delay of the first disbursement. We ended up being billed about RM1,200 of penalty. After making an appeal in writing, the amount was reduced to RM800. About one year ago, my Adik was billed about RM3,000 of penalty and finally reduced to about RM2,500. Most recently, my niece was billed a whopping RM15,000 of penalty! Apparently her bank took about 5 months to process her loan application. Since she bought a house that was about half way completed, the penalty was even higher as the progress billing from the developer has reached an advanced stage. The bank also delayed on every progress payment made subsequently. She’s trying to make an appeal now, but I don’t know how much waiver she will get.

Perhaps our Kementerian Perumahan should review the standard clause in the SPA that allows developer to charge interest of 10% on late payments. Since interest rate is low now, it makes sense to revise the interest rate penalty of 10% downwards. Otherwise, the developer will be making profits from the penalty as the rate they charge the buyers are higher than their cost of funds. Secondly, since the loan approval processing always takes a long time, perhaps the grace period for the first bank disbursement to the developer should be extended, provided that the purchaser shows proof to the developer that his loan application is being processed. As far as I know, one reputable developer has already done this. After all, why should the purchaser be penalised when he did not cause the delay? I presume all the players in the property development industry should know the normal processing time for a bank loan, so from there, a more reasonable grace period should be established. Thirdly, for inefficient banks like the one that granted the loan to my niece, shouldn’t they, instead of the purchasers, be penalised? After all, the funds that were not disbursed on time to the developer were earning interest somewhere and this was pocketed by the bank.

I think I have covered most of the expenses for buying a house. As for the expenses to furnish the house, that’s another grey hair topic which deserves a separate post of its own.


Bustaman said...

Don't forget to choose a reputable developer so you won't end up paying for a half-completed house.

Yasmin's Mummy said...

I wonder what happens to the unfortunate buyers .. hope they have a recourse..