Hunting for a dream home is an experience that a first-time homebuyer is not likely to forget. However, you might overlook certain critical elements in calculating the total expenditure of acquiring your home.
First-time homebuyers scouting around at various locations, either by visiting the development or by browsing online, are likely to focus only on the biggest expenditure involved – the selling prices of units. You might be further enticed by promotions, discounts and rebates by developers. However, it is not just the down payments and progress billings that will make up your total costs.
There are other important costs in the home purchasing process that you need to factor in, especially towards the end of the transaction. These are variable, third-party fees that are often referred to as closing costs. Ignore them and you may risk financial setbacks and disappointment in realising your dreams of owning a home.
Below are a few significant closing costs that you need to include in your property budget planning:
1. Stamp duty
An unavoidable cost in property purchases, stamp duty is the tax placed on your property documents during the sale or transfer of the property. This includes stamp duty on the Sale and Purchase Agreements (SPA) of your property and stamp duty for the Memorandum of Transfer (MOT), both of which are calculated based on the purchase price. You will also need to pay the stamp duty on your loan agreement based on a flat rate of 0.5% of the total loan.
In the recent Budget 2019, the government announced a stamp duty hike for properties costing more than RM1 million, where the rate was increased from 3% to 4% (refer to the table below). Hence, the latest stamp duty rates (on the SPA & MOT) are calculated on a tiered basis as below.
For instance, when purchasing a property which costs RM750,000, you will have to pay a total of:
{(First RM100,000 X 1%) + (Next RM400,000 X 2%) + (Remaining RM250,000 X 3%) } + 0.5% of loan amount (90% of RM750,000)
= {RM1,000 + RM8,000 + RM7,500} + 0.5% X (RM675,000)
= RM16,500 + RM3,375
=RM19,875
Do take note, however, that the new government has introduced special exemptions for first-time homebuyers under the Home Ownership Campaign (HOC) 2019, including a stamp duty waiver for the purchase of new launch properties priced between RM300,000 and RM1 million, from 1 January to 31 December 2019.
For instance, when purchasing a property which costs RM750,000, you will have to pay a total of:
{(First RM100,000 X 1%) + (Next RM400,000 X 2%) + (Remaining RM250,000 X 3%) } + 0.5% of loan amount (90% of RM750,000)
= {RM1,000 + RM8,000 + RM7,500} + 0.5% X (RM675,000)
= RM16,500 + RM3,375
=RM19,875
2. Legal fees
Unless you have a legal background and possess some of the required expertise and knowledge, you are most likely to engage in legal assistance for your property purchase. Your appointed solicitor will prepare all the necessary documents and contracts to facilitate the transfer of the property.
The legal fees for preparation of the Sale and Purchase Agreement are calculated as a percentage of the purchase price, varying from 0.25% up to 1% depending on the value of the homes.
Say for instance you are purchasing a property which costs RM750,000, you will have to pay a total of:
(First RM500,000 X 1%) + (Next RM250,000 X 0.8%)
= RM5,000 + RM2,000
= RM7,000
Note that some developers may absorb the legal fees but you will always need to pay the stamp duty yourself as a buyer.
3. Real Property Gains Tax (RPGT)
A buyer with long term planning, beyond owning a first home, should also look ahead to the possibility of eventually selling the property in the future.
This might be for a number of reasons. For example, you might want to upgrade, leave the area for a new job, find a home better suited to your preference or just sell it for financial purposes because the market is booming. Regardless, disposing your home to a new buyer will also entail paying real property gains tax (RPGT) if you are profiting from the transaction.
Doing advance research on RPGT could help you sell your property at the right time and save you a lot of money!
In Malaysia’s Budget 2019, it was announced that RPGT rates are to be revised starting next year. Malaysian individuals who sell off their property in the sixth (and subsequent) years of ownership will now have to pay a 5% RPGT (no charges were applied before). Meanwhile, those who dispose of their home after less than 3 years will be charged 30% RPGT; 20% in year 4 and 15% in year 5.
Bear in mind that there are RPGT exemptions for the following conditions:
1) An exemption of 10% of profits or RM10,000 per transaction (whichever is higher) for these 2 scenarios:
Citizens & Permanent Residents
a) If an asset is transferred as a gift by a donor who is a Malaysian citizen and the acquirers are either husband and wife, parent and children or grandparents and grandchildren. This exemption is not applicable for transfers between siblings.
b) Once in a lifetime exemption on the chargeable gain on disposal of 1 private residence by a Malaysian citizen or Permanent Resident (PR).
2) Homeowners who own low or medium cost housing priced below RM200,000 are exempted from RPGT when disposing of their property.
Moreover, in the recent Budget 2020, the government made an amendment to the RPGT – beginning 2020, a property’s market price on 1st January 2013 will be used as the initial point of valuation when calculating its property gain tax upon disposal. The previous base year was set on 1st January 2000.
4. Property agent fees
If you engage property or real estate agents, especially in securing property in the secondary market, their fees will be an additional cost on top of the price you pay for your home. Although most buyers nowadays are aware of this, there are some who do not factor agent fees in the total cost. This could be a setback, especially if you are on a tight budget.
The maximum fee chargeable on services provided by agents on the sale of any land and building is normally 3%, although many brokers and agents charge less than that on a case-to-case basis.
As a buyer, make sure that you negotiate and confirm your agent fees before officially engaging them to represent you in any property transactions. This will help when calculating your total cost in advance.
5. Property valuation fees
Unless you’re paying for the property in cash, you’re likely to be looking for a housing loan from banks to fund the purchase. Financial institutions will usually require a valuation of the property before approving the loan, and most banks will charge a fee for these valuations.
Similar to the legal fees, the valuation fee is calculated as a percentage of the purchase price:
For the first RM100,000 =0.25%
Next residue up to RM2 million = 0.2%
6. Home insurance
Most banks will require buyers to purchase insurance on their homes as part of the housing loan package to protect the value of the property. This type of insurance is usually referred to as the Mortgage Reducing Term Assurance (MRTA) and its costs are dependent on the age of the borrower (usually the older the borrower, the higher the MRTA) and the total mortgage on the property (usually estimated at 3% to 5% of the total mortgage).
The MRTA isn’t the only option, however, homeowners can also consider , which offers the repayment of your outstanding home loan as well as a guaranteed cash value back at the end of the scheme.
7. Home renovations
For example, after you have completed the purchase of the house, you might want to change wall colours, doors, floorings, windows, fences, roofing, rooms and other elements of the house to suit your preferences. These could easily add up to your total costs, depending on whether the renovations involved are major or minor.
Here’s a tip: Most experts recommend not spending more than 10% of your home value on renovations.
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