Under-construction and off-plan property are preferred choices when foreigners decide to invest in real estate in Southeast Asia. There are both benefits and drawbacks when going for this option, the buying process is also somewhat different.
I often receive questions related to the buying process, financing, payment schedules and taxes for these kind of properties, but it can be difficult to find summarized information about these items. In this article you will learn the following for under-construction property:
- The buying process
- Payment schedule
- Legal fees and stamp duty
- Procedure of the SPA (Sales and Purchase Agreement)
Buying process for under-construction property
a. First of all, you need to find a handful of properties, shortlist them and choose a property
b. You pay a booking fee to enter into the buying process. There is no fixed amount, as the booking fee is decided by the developer. Generally, it’s 2% of
the purchasing price but can be any other amount
c. You apply for a mortgage to secure your finances and the property, you can also choose to pay everything with cash
d. You now have 14 or 21 working days to execute the Sales and Purchase Agreement (SPA). Same as it goes for the booking fee, the duration is determined by the individual developer
e. Upon securing the mortgage, you will arrange the time and venue with your conveyancing lawyer to prepare the SPA
f. You pay the interest based on the loan amount disbursed to the developer from the bank. In case you’re a cash buyer, you pay the amount yourself in accordance with the completion of the construction stages
g. The developer informs you once the development is completed. You arrange to obtain the Vacant Possession (VP) from the developer
Financing under-construction properties in Malaysia
Both local and foreign buyers can apply for a mortgage when buying property in Malaysia. An important point to make is that the decision taken by the bank strongly depends on the documents provided from you as applicant.
The developer will normally have end-financing banks providing mortgages to the purchasers of the development.
For example, let’s say that Bank A and B are the end-financiers for the development. It will in that case be easier for you to apply for a mortgage from these banks, since they are appointed by the developer and have all the necessary information about the development.
However, if you prefer Bank C, which is not a panel bank of the development, the process may take longer time as Bank C will have to work and tie up with the developer.
It’s therefore advisable to apply for a loan to the panel banks engaged by the developer for a more hassle free process.
In Malaysia, the maximum loan margin is 70% of the purchase price to foreign buyers. However, due to the current economic climate, the banks tend to approve 50 to 60% to foreign buyers.
At the moment I’m writing this article, the interest rates for residential loans are 4.4 – 4.6%. Generally, the loan tenure is maximum 35 years or 70 years old in case you’re a foreigner.
If you buy a residential property in Malaysia, you have to follow the payment schedule prescribed by the Malaysia Government. The payment schedule is governed under the Housing Development Act (HDA) and was last updated in 2016.
The payment schedule is as follows:
1). Immediately upon the signing of the Sales&Purchase Agreement (SPA): 10%
2). Within thirty (30) days after you receive the developer’s written notice of the completion of:
(a) the work below ground level of the building, comprising the unit, including foundation of the said building: 10%
(b) the structural framework of the unit: 15%
(c) the walls of the unit with doors and window frames placed in position: 10%
(d)the roofing/ceiling, electrical wiring, plumbing (without fittings), gas piping (if any) and internal telecommunication trunking and cabling to the unit: 10%
(e) the internal and external finishes of the unit, including the wall finishes: 10%
(f) the sewerage works in the building: 5%
(g) the drains in the building: 2.5%
(h) the road serving the building: 2.5%
3). On the date you take vacant possession of the unit, with water and electricity supply ready for connection: 17.5%
4). On the date you take vacant possession of the unit (as in item 3.) and the developer has issued and delivered the instrument of transfer to your solicitor, together with the original document of the strata title for the unit: 2.5%
5). From the date you take vacant possession of the unit (as in item 3.) the developer’s solicitor will act as stakeholder to secure the remaining payments to the developer as follows:
(a) paid 8 months after you take vacant possession of the unit: 2.5%
(b) paid 24 months after you take vacant possession of the unit: 2.5%
In Malaysia, you will only be billed upon the completion of each construction stage. For example, after paying the 10% upon signing SPA, you will have to pay the following 10% when the groundwork of the development is completed. This might be 6-12 months after the SPA signing, the time needed depends on the size of the development and construction phase.
If you buy in cash, you need to pay the fees after you’ve received invoices from the developer, upon the completion of each stage. If you have applied for a mortgage from a bank, the bank will pay the developer directly and you will have to pay the interest based on the total loan amount disbursed to the developer from the bank.
Legal fees and stamp duty
A great benefit of buying under-construction property in Malaysia is due to that most of the time the developers will absorb the legal fees for the SPA and the Loan Agreement. This is to allow a smoother buying process. Sometimes the purchasers will only have to pay a small amount of disbursement fees charged by the lawyers.
However the stamp duty is more significant than the legal fees as the stamp duty is greater. Normally, you will have to pay the stamp duty as a buyer.
When do I need to pay the stamp duty?
The stamp duty for the SPA is payable upon the transfer of the strata title, or individual title, to the owner. The process is also known as Memorandum Of Transfer (MOT). In the past decades, some developers tend to delay the process in delivering the strata title to buyers.
But the Malaysian Government revised the acts in 2016 to urge the developers to deliver the strata title upon the completion of the development.
Nowadays, the purchasers are only required to pay the stamp duty of the SPA upon the completion of the development and the delivery of the strata title.
How high is the stamp duty for under-construction property?
The stamp duty increases progressively as follows:
- RM 0 – 100.000 = 1%
- RM 100.001 – 500.000 = 2%
- > RM 500.001 = 3%
The stamp duty charged on the Loan Agreement is more straightforward. It is 0.5% of the total loan amount, sometimes the developers will also absorb the stamp duty for Loan Agreement.
Procedure of the Sales and Purchase Agreement (SPA)
All the purchasers are requested to execute the SPA in front of a lawyer in Malaysia. However if the foreign purchasers would like to manage the SPA outside of Malaysia, for example in their home countries, it shall be arranged in the Malaysia Embassy of the respective country under the witness of Notary Public.
About the author:
This article was written by Herrman Liew, currently working for MIP Properties in Petaling Jaya, Malaysia.
The company has won numerous awards and helps both locals and foreigners to find new developments, sub-sales and rental properties in greater Kuala Lumpur.