Skyrocketing house prices don't encourage the idea of a larger down payment for your new home, but doing just that can save you a tonne in the long run.
Be it apartment or landed property, a vast majority of home buyers opt for the bare minimum, the fixed 10% - and to be quite frank, not many have the privilege of pumping in extra toward ownership.
In the event that a sudden windfall graces you or you simply have extra cash stashed away, we reveal why a larger down payment may help you cut cost, help medicate unnecessary worry and take you a couple of steps closer to owning your own place before you can say "vacant possession".
1) Easier Loan Approval
Any lender would find comfort in dispensing a sum to its borrower if confidence is assured – and a fatter down payment for your home would yield a less scrutinising processing period.
A large down payment is a strong indication that the borrower has a scrupulous and disciplined ability to save or simply has the income and means to afford a home. It also shows creditworthiness and you are more than likely to be a poster boy of a borrower that is less likely to default on mortgage payment.
Pumping a larger amount than the minimum 10% also puts you right on top of the priority list should it be hot property that you are after, and allow you to book ahead of everyone else.
A higher down payment reassures lenders that you possess the means and is a way to quickly sign, seal and deliver the keys to your home.
*Note: The above is definitely a good possibility but isn't assured. It will still depend on your previous payment records in other loans you took and other borrowing requirements such as salary and service industry.
2) Save on Interest Charges
Effectively, a higher down payment for your new home would save a tonne in interest charges which added up, can be quite shocking. Saving on interest charges throughout the span of a home loan tenure is illustrated in two scenarios below:
|Details||Scenario A||Scenario B|
|Down Payment||RM50,000 (minimum of 10%)||RM70,000 (more than 10% minimum)|
|Loan Amount (25 years)||RM450,000||RM430,000|
|Total Tenure Payment||RM750,375||RM717,024|
Assuming the interest rate charged on the loan per annum is 4.50% for the span of both tenures and have no payments defaults or fines, the results above show that an extra of RM20,000 channeled into the home's down payment in Scenario B would eventually yield RM13,351 in interest savings just because your loan was RM20,000 lower than in Scenario A.
You'll note that over the time of your loan you would have repaid nearly 2x the original sum thanks to interest charges. Anything to reduce that sum will certainly help!
Evidently, a larger down payment not only saves you in total repayment interest charges but cuts down monthly payment also - which could well be channeled into other forms of commitments.
If you're having trouble figuring out the repayment process and interest costs of your desired home, use our home loan calculator to help you make sense of the digits.
3) Lesser Risk When Selling
In the world of real estate, prices seem to adopt a steady rise in nature – however, these prices are capable of floating and maybe even dropping in the event of a recession. Worse, your house could retain purchase price but find no buyer during a property bubble where prices are too high out of reach for the regular worker.
Taking out a smaller loan means being able to sell lower than your 'competitors' and if you are purchasing for rental yield - you will be able to ask a lower rental price to cover your monthly repayments.
Irrespective of reason, a larger down payment upon purchase would give you more negotiation room whether you intend to sell or rent out your house.
A recession is capable of bringing your home's value down, and it is important to have a mortgage balance that is lower than that of the prevailing value of the home.
To Each His Own
Unfortunately, putting large down payments is a luxury not many have – but its benefits surely beg for attention should one have excess cash to spare.
It is also true that one may instead use this extra cash for personal investments, unit trusts, or even fixed deposits – but one things for sure, it'll surely take you a whole lot closer to calling yourself the lawful owner of the place you call home.
Whichever you choose, ensure you've thought the process through and that it is best for you.