A house or a car? Which should you buy first?

Deciding whether to buy a car or a house first is a significant financial decision that many young adults face. Both choices come with their own sets of advantages and challenges, and the right decision often depends on individual circumstances, financial goals, and lifestyle needs. This article explores the key factors to consider when making this decision.

One of the most crucial aspects to consider is your Debt-Service Ratio (DSR). DSR is a measure of the loan instalments you service in a month compared to your monthly income. For instance, if you earn RM4,000 and pay RM400 in loan instalments, your DSR would be 10%. Most local banks limit borrowings to 60% in DSR, meaning you could service up to RM2,400 in monthly loan instalments given your salary.

Loan Eligibility

Your loan eligibility will significantly impact your decision. Suppose you have RM20,000 in savings. You could buy a car worth RM95,000 by putting down an initial payment of RM9,500 and financing RM81,000 with a nine-year loan. This would result in a monthly car loan instalment of RM1,000, making your DSR 25%. Consequently, the maximum home loan you’d be eligible for would be reduced to RM280,000, limiting your property options to flats or low-/medium-cost apartments.

Opting for a Low-Priced Car

If you choose to buy a low-priced car for RM25,000, you could pay RM2,500 in deposit and finance the remaining RM22,500 with a nine-year car loan. This would result in a monthly instalment of RM350, making your DSR 8.75%. Your maximum home loan amount would be reduced to RM410,000, offering you more property options. Thus, based on DSR and the Rule of 200, it would be better to buy a low-priced car.

Monthly Cash Flow and Future Savings

Consider your monthly cash flow and future savings. If you buy a RM95,000 car with a RM1,000 monthly instalment, and factor in car-related expenses such as petrol, parking, tolls, and maintenance, you might end up saving only RM500 or less a month. Over five years, this would amount to RM30,000 in savings, which isn’t substantial for buying property. On the other hand, if you buy a RM25,000 car with a RM350 monthly instalment, you could save approximately RM1,400 a month, or RM16,800 a year. Over five years, this would amount to RM84,000 in savings, which is decent for property investment.

The Case for Buying a House First

If you can manage without a car, buying a house first could be a wise decision. Property is generally considered a good long-term investment, and owning a home can provide financial stability and equity growth over time. Moreover, real estate often appreciates in value, offering potential capital gains in the future.

The Case for Buying a Car First

If a car is necessary for your daily commute or lifestyle, buying a car first might be the better option. A car can provide convenience, especially if public transportation is not reliable or accessible. However, it’s advisable to opt for a lower-priced vehicle to minimize the impact on your DSR and future savings potential.

Balancing Both Needs

For many, balancing both needs is the key. You might consider buying a low-priced car first to ensure mobility while saving for a property. This approach allows you to enjoy the benefits of both without overextending your finances.

Expert Opinions

Financial experts often recommend prioritizing property over a car due to the appreciating nature of real estate. Ian Tai, a financial content writer, suggests that if you can manage without a car, buying property first is a good idea. However, if a car is necessary, opting for a lower-priced vehicle can help boost your monthly savings and allow you to save for property investment.

Long-Term Financial Goals

Consider your long-term financial goals. If your goal is to build wealth and financial stability, investing in property might be more beneficial. On the other hand, if immediate convenience and mobility are more important, a car might take precedence.

Impact on Lifestyle

Your lifestyle needs also play a crucial role. If you live in an area with excellent public transportation, you might not need a car immediately. Conversely, if your job requires frequent travel, a car might be indispensable.

Ultimately, the decision to buy a car or a house first depends on your individual circumstances, financial situation, and long-term goals. Carefully evaluate your DSR, loan eligibility, monthly cash flow, and future savings potential. Whether you choose to buy a car or a house first, ensure that your decision aligns with your financial objectives and lifestyle needs.