You may think that you are financially ready to be a homeowner. Do you know what kind of residential property and which price point you should be looking at? Determining your personal housing affordability isn’t always easy, as you will have to find the right balance between wants/needs and financial capability.

Do you have the earning power to purchase a brand new condominium near the city centre? Or could you only afford a sub-sale apartment somewhere in Shah Alam?

Most importantly, how much cash would you need to buy a typical starter house within Klang Valley, which usually ranges between RM400,000 to RM700,00? Will your salary be able to finance the down payment and monthly repayments? Before you start surveying for your dream abode, let’s take a look at your finances and gauge how much you can realistically pay.

When it comes to home purchasing, the general rule of thumb is that your Debt-to-service (DSR) ratio should not exceed 70%. The DSR percentage shows how much of your income is being used to pay off debt and if you can afford to take up the housing loan you have in mind. This formula is commonly used by banks to assess a borrower’s ability to repay his/her monthly instalments, where

DSR = Debt/Net Income X 100

Debt refers to all existing financial obligations, such as credit card repayments, personal loans and student loans, whereas net income refers to your income after deductibles, such as income tax and EPF.

Most banks including Maybank and Public bank have a DSR cap of 65-70%, so it is crucial that you calculate your repayment ability for your target home before making the next move. The last thing you want to be doing is to utilise your entire salary for housing expenses.

For instance, let’s assume your household income is RM5,000 per month (this could either be the salary of a single working professional or a double-income couple). After deducting EPF, income tax and SOCSO, your net income would amount to roughly RM4,300.

According to the data captured by the Department of Statistics, the median household income in Selangor is RM7,225 but we decided to base our benchmark of RM5,000 on the national median of RM5,228 instead, to take into account that most first time homebuyers fall within the 25-35 age group and they do not have that much-earning power yet.

Hence, in order to fulfil the minimum 70% DSR rule, your household’s total debt cannot exceed RM3,010.

DSR of 70%= RM3,010/RM4,300 X 100

Let’s say you have the following financial obligations. These estimates are loosely based on the average Malaysian millennial living in an urban area:

Car loan: RM500

Credit card repayments: RM400
PTPTN Loan: RM100.
Other financial debt/obligations = RM1,000.

Therefore, for those with a gross household income of RM5,000 and net income of app. RM4,300; when taking up a home loan, their monthly instalment figure must not be more than RM2,010.

Total Debt – Other financial debt = RM3,010 – RM1,000 = RM2,010

Of course, the RM5,000 household income benchmark will only apply to a certain percentage of the population.

Looking for your dream home is tough, but forking out the initial 10% down payment is an even bigger headache, especially if you’ve just joined the workforce and don’t have significant savings. Nevertheless, there are plenty of alternatives out there which will support your homeownership dream, including utilising the monies from your EPF Account 2.

Now that you roughly know which price ranges you should be looking at, the next thing you would want to determine is which neighbourhood or area to be scouting out for your property. Ask any urbanite for their dream residential location, and most will quote a city centre address – surrounded by plenty of conveniences including public transportation links, popular restaurants, malls and entertainment outlets. The only roadblock is, of course, the hefty price tag.

Nevertheless, there are plenty of residential products throughout various suburbs located on the city fringes. The upgrades in roads networks and rail transportation infrastructure in the past year or two have also contributed to more homes being supplied in the market.

So, upon calculating your DSR to determine the corresponding property price that’s affordable, you can now narrow down your home search according to the property type and location. For instance, if you are looking for a condominium below RM500,000, then you should be looking at areas such as Shah Alam, Cheras, Setapak and Sri Petaling. Those with a higher budget can scope out the following neighbourhoods – Kota Damansara, Subang Jaya and Taman Desa.

Alternatively, you can still purchase a terrace house for below RM600,000 in suburbs like Klang, Kajang and Setapak. Ultimately, it all depends on your financial capability. All the best and happy home hunting this 2019!

This article was originally published as "How much should the average Malaysian household income be to afford a home in KV?" by iProperty.com.my  and is written by Reena Kaur Bhatt.