If you’re in your 20s, how you manage your money today will significantly impact your wealth in your 30s and beyond. So, here’s a question that many young people might be asking: “Which should I buy first, a house or a car?”
To answer this, let’s assume you’re 25 years old, earning RM4,000 a month and renting a room for RM500 a month as you’re from out of state. Your living costs are approximately RM2,000 monthly, including rent.
Here are some considerations:
1. Understand DSR
Debt-service ratio (DSR) is a measure of the loan instalments you service in a month versus your monthly income. For instance, if you earned RM4,000 and paid RM400 in loan instalments, your DSR would be 10%.
Let’s assume, in general, local banks limit one’s borrowings to 60% in DSR. You could, therefore, service up to RM2,400 in monthly loan instalments given your salary.
DSR
Monthly loan instalments / monthly income x 100%
= RM400 / RM4,000 x 100%
= 10%
Based on the Rule of 200, you could borrow up to RM480,000 in home mortgage:
Maximum loan mortgage
Maximum monthly loan instalments x 200
= RM2,400 x 200
= RM480,000
Of course, this would only be the case if you currently have zero loan commitments.
2. Loan eligibility
Say you had RM20,000 in your savings account. You could buy a car for about RM95,000 by putting down an initial payment of RM9,500 and financing RM81,000 with a nine-year car loan.
You would then service a car loan instalment of RM1,000 a month, with your DSR being 25%. Meanwhile, the maximum home amount you’d be eligible for would be reduced to RM280,000.
DSR
Monthly loan instalments / monthly income x 100%
= RM 1,000 / RM 4,000 x 100%
= 25%
Maximum home mortgage
Maximum monthly loan instalments x 200
= (RM2,400 – RM1,000) x 200
= RM1,400 x 200
= RM280,000
With only up to RM280,000 in mortgage, your property options would be flats or low-/medium-cost apartments.
3. What about a low-priced car?
Let’s say you opted to buy a low-priced car for RM25,000. You could then pay RM2,500 in deposit for the vehicle, and finance the remaining RM22,500 with a nine-year car loan.
With an instalment of RM350 a month, your DSR would be 8.75%. Your maximum home-loan amount would be reduced to RM410,000 from RM480,000.
DSR
Monthly loan instalments / monthly income x 100%
= RM350 / RM4,000 x 100%
= 8.75%
Maximum home mortgage
Maximum monthly loan instalments x 200
= (RM2,400 – RM350) x 200
= RM2,050 x 200
= RM 410,000
This would clearly leave you with more property options to choose from. As such, based on DSR and the Rule of 200, it would be better to buy a low-priced car.
4. Monthly cash flow and future money
Now, let’s review your financial situation where you earn RM4,000 a month, with living costs and rent of RM2,000.
Assume you decided to buy the RM95,000 car with an instalment of RM1,000 a month. Don’t forget to factor in your car-related expenses such as petrol, parking, toll, and repairs and maintenance.
It’s possible you might end up saving only RM500 or less a month, or RM6,000 in annual savings. If you maintained this rate over the next five years, you would amass RM30,000 in savings, which isn’t substantial in terms of buying property.
But if you opted to buy a RM25,000 car with a RM350 monthly instalment and could limit your car-related expenses to about RM250 monthly, you would be able to save approximately RM1,400 a month, or as much as RM16,800 a year.
This would amount to RM84,000 in savings over a five-year period, which is decent in terms of shopping for property in the Klang Valley.
So, what’s the bottom line? If you can get by without a car, it would be a good idea to buy property first. But if a car is necessary, the next best choice would be to buy a lower-priced vehicle first, which would help boost your monthly savings and allow you to save for investment into your property.
This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.