These days, the requirements to get a loan seems tougher than ever. Actually, is it because of the loan or is it because of the person? Banks need to lend, else they have no profits and could not even pay the interest on our fixed deposits. Okay, they could invest in many other stuffs but generally if they stop lending, they stop earning. Properties have to be affordable enough for the masses to buy. However, Khazanah Research Institute’s study showed that on a median household income basis, a Malaysian household could only afford a property of up to RM270,000. Most unsold units here in Malaysia are priced above RM250,000. That explains a bit.
Have we wondered if someone earns just RM2,500 could they afford a property which is priced much higher than RM270,000? Housing Affordability Index says that to be really affordable, the calculation is as such: Yearly income x 3. Using a Malaysian earning just RM2,500 per month, the calculation would be RM2500 x 12 (months) x 3 (Affordable) = RM90,000. It is the same for Australia. In their case, for the property to be categorised as affordable, it would be AUD2,500 x 12 (months) x 3 = AUD90,000. Refer to the image for what happens if it is X4 or X5 instead. Anything above 5.1 is considered SEVERELY Unaffordable.
As per the calculation, a RM300,000 home is affordable to someone earning RM100,000 per annum. Actually, have we wondered, what if that someone earns just RM2,500 / month or RM30,000 per year could he get a home loan approved for a home priced at RM360,000? ACTUALLY, it is a potential YES. As long as they have no other loans and earns a net income of RM2,500 the banks may just lend them the money to buy this RM360,000 home based on a Debt Service Ratio of less than 70 percent! Please refer to the image. That RM360,000 property requires a mortgage payment of around RM1,641 per month and this is only 66% DSR for the borrower. By the way, the owner could even rent out one or two rooms from the home he bought to get additional money to supplement his monthly income! Note: As long as this person is totally free of any other debts including credit cards, car or other instalments.
These days however, this individual will be considered a ‘rare breed’ if any or ‘extinct’ in many countries. There’s just too many other distractions which will take away our money. The question of whether someone earning RM30,000 per year could afford a RM360,000 property is thus a yes. By the way, Hong Kong’s median income versus the median home price has a House Affordability Index of 20. In other words, the calculation would have been like this: RM30,000 x 20 = RM600,000. By the way, in many countries, their Housing Affordability Index is above 5 and for Hong Kong it is 20. Happy understanding.
written on 4 Nov 2018
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