Reasons to Pay a Higher Down-Payment
If you’re new to real estate with a small fund to start with, you’re probably worried about the high loan rejection rates by Bank Negara Malaysia, which is reportedly as high as 70%, although several states such as Penang has tried to overcome this problem by creating new, lower-value categories of affordable housing, for starters, and parties have been mulling the reintroduction of DIBS (Developers Interest Bearing Scheme). Even without intervention from the government, though, you yourself have the ability to influence your loan application’s success rate, and part of that can be achieved by making a bigger down-payment.
Higher Chances of Approval
Firstly, a higher down-payment means a lower loan value, and secondly, it also means that you seem more financially stable to your bank since you’re able to cough up a big sum up-front. Most loans are rejected due to Bank Negara Malaysia’s new policy of evaluating eligibility based on a household’s nett income instead of gross income, which severely reduces the eligibility of applicants who are trying to get by on the minimum down-payment and maximum loan value.
A bigger down-payment reduces your loan value and thus ups your chances of a successful application since you’re more likely to be able to repay the loan with your nett income.
Lower Interest Rates
The lower your loan-to-value ratio, the lower your interest rate, as the lower loan value translates into lower risk for the bank. Don’t under-estimate the significance of a 0.3% reduction in your interest rate! Mortgage loans are long-term, so that supposedly small percentage will end up saving you thousands in the long run. However, keep in mind that the interest rates offered to you are also influenced by your credit score.
Lower Monthly Installments
When you owe the bank less, your minimum monthly installments are also less. Besides less interest, you also have more funds left over to invest or spend as you wish. It might mean the difference between paying RM3,000 a month or just RM2,400, resulting in RM600 savings every month, RM72,000 every year!
You Can Pay Off Your Mortgage Faster
Of course, your mortgage tenure will also be shorter if the value of your loan is lower. You can even expedite the process by paying more than the required minimum payment. This way, you’ll be able to call your property your own long before the typical 35-year tenure holder is up.
Your Funds Will be Tighter in the Short-Term
A down-payment is something that you have to pay in a lump sum – that is, the full sum, at the same time. 20% of a RM400,000 home will mean RM80,000 up-front. If you’re a fresh graduate with no parental financial back-up, such a huge sum may be difficult to cough up. If you’re able to pay up 20%, 30% or even 50% of the value of the property, though, you stand to gain on interest savings and freer future household income.
Property Investment is Profitable
Down-payment can also be seen as a form of investment in itself, a sub-set of the property purchase you’re hoping to make. The extra money you put towards your down-payment is almost guaranteed to bring you returns, albeit directly only when you sell the property. With Malaysia’s property sector being as robust as it is even during these tough times, your down-payment investment is guaranteed to bring you positive returns in the long run.
Sometimes keeping your loan value small isn’t just about financial standing at all. Low interest rates will reduce the effectiveness of a larger down-payment. However, less debt can bring you peace of mind, which is something not everyone is willing to trade off in return for freer income.