Should You Buy A Car Or House First


Calculating your car purchase may surprise you. (rawpixel.com pic)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%• RM1,584The 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 firstLet 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• RM126,200Buying your first property is a sense of achievement. (rawpixel.com pic)Option 2: Buy a property firstYou 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• RM316,800Let 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• RM3,440Thus, 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• RM1,111The 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.comIan Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. - FMT

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