By Peter Lo
With the economic downturn not seeing any bottom, it is quite difficult for future house owner to think of owning a house. For many years, owning a house was based on the 10:90 ratio. Buyers will make a down payment of 10% of the property cost and the remaining 90% will be financed through monthly installments.
In order to assist potential owners to own a home under such economic weather, innovative property developers have begun easing the entry level with schemes such as the 5/95. Under this scheme, buyers can make a down payment of 5% while the remaining outstanding is payable upon completion of the property. This effectively lowers the risk of the buyer.
Now, it is not in the interest of this article to discuss the advantages of the 5:95 scheme compared to the conventional 10:90 but rather, to illustrate which is better in terms of financial planning and management.
For example,
Buyer : Ahmad; Engineer; To marry in 9 months.
Property Value : RM350,000
Potential Household Income : RM 8,500
No doubt, the 5/95 scheme has a higher interest payable component than the conventional 10/90 at RM10,211.44 more. However, in terms of present value of money, buyer of the 5/95 scheme is paying RM17,500 less. The interest amount too will be realized 25 years later.
Now if Ahmad is financially savvy, the extra RM17,500 can be used for other investments such as a Unit Trust with an expected return of 8% per annum. Assuming Ahmad does invest in such a Trust,
Invested Amount : RM17,500
Expected Annual Returns : 8%
Amount after 10 years : RM 38,843.81
Should the above investment materializes, Ahmad can easily use the money to offset his housing loan commitment, thus reducing the loan tenure substantially simultaneously. If however he chooses not to, the profit he earned can always be reinvested in his children’s education fund, in another piece of property or even a decent vacation with his wife in Europe. Now wouldn’t that be delightful?
The calculations above are based on the basic theory of a conventional loan. It is not modeled after any live banking module as each bank has its own set of methodologies for the different products they offer. Further, banks usually will also change the features of the loan when the BLR is affected. For more clarity, consult your financier.
Published in the 3rd Anniversary Edition (May-June) 2009
