Singapore has one of the highest percentage of citizens who owns their residential property in the world. This is a very unique phenomenon. Over time, it has become a basic criteria before couples decide to marry.
Buying your first property can be very daunting, as it is a few hundred thousands dollars purchase with a loan tied-up for the next 25 years or longer.
Before making the purchase, there are many questions that you will have to answer satisfactorily.
Question: How much should we budget for our first property?
Some couples prefer BTO flat than resales because it comes heavily subsidised by the government, which explains why they’re often cheaper than resale flats. However, on the other hand, you may get more grants when buying a resale HDB flat instead of a BTO.
“your purchase price should not be higher than 5 times your combined income.”
Whichever you choose, you must set a realistic budget for it. In a normal circumstances, your purchase price should not be higher than five times your combined income. Assuming your combined annual income is $100,000. Your purchase price should not be more than $500,000.
Assuming both of you are 30 yrs old with equal earning, taking a $400,000 loan at 2.6% pa (HDB loan) for 25 yrs. Your monthly instalment will be $1,811. Your CPF-OA allocation rate is 23% or $23,000 per annum which will be sufficient for the monthly instalment. This will give you better cash flow.
“What if we love the property but is more than 5 times our annual income? Can I still buy it?” It’s still feasible if you can afford a higher down payment and keep the loan at 4 times annual income.
Note – This calculation holds true when each monthly salary is lower than the CPF Contribution ceiling, currently at $6,000.
Question: Should We Stay With Our Parents First?
From a financial planning perspective, it gives you more time to earn interest and pay less for your loan. How does it work?
Using the above scenario, and you defer the purchase for 5 years. You can then invest the $100K downpayment and $1,811 monthly instalment amount for a reasonably targetted 6% pa investment return. This will yield $261,870 in 5 years time. Also, assuming the property price inflate at 2.5% pa, it will increase to $565,704
With the $261K you had accumulated, you can use it as downpayment and lower the loan to $305K. Going for the same instalment amount of $1,811, you will pay off the property in 17.4 years. In short, you will own the property 2.6 years earlier if you defer the purchase by 5 years.
There are 2 variables here. First, how to achieve 6% pa investment return? Every investment comes with risk, talk to your trusted financial consultant to construct a broadly diversified investment portfolio to help you to achieve the investment return within your tolerable risk appetite. Next, property inflation in the next 5 years. HDB prices have generally been quite stable in the last 10 years. You may refer to the relevant statistics for details.
Question: Should We Take HDB or Bank Loan?
The HDB loan rate is stable and predictable. It’s predictable because it is tagged at 0.1% higher than the CPF-OA interest rate for first timer. And It is stable because the CPF-OA interest rate has not change since Jul 1999 as the law demands CPF Board to pay minimum 2.5% interest for CPF-OA.
The bank loan rate fluctuates and it’s very competitive. Every bank that offers home loan will price the rate attractively to secure customers. Moreover, with the current interest rate environment, bank loan rate is much lower than the HDB loan rate.
However, you have to prepare to pay higher monthly instalment should the interest rate increase. The bank loan rate was around 2.6% pa and it was on the uptrend before COVID-19.
Consider your expected future income and the possibility of making partial repayment to reduce the outstanding loan amount before making the decision of which loan to take.
Question: How Much Should We Spend On Renovation?
Before budgeting for your renovations, ask yourselves how many years will you stay in the property? If you foresee that you will upgrade or move out of the estate within 10 years, then is it worth to set a high budget on renovation? Unlike property, renovations will never make any profit for you should you sell the property. It’s purely an expense.
If you foresee yourselves staying for a really long term, then it may be worth to invest in better quality renovation. A sensible choice will be to renovate what you can afford comfortably, without taking any renovation loan.
The above discussion is just some financial perspectives on buying your first property. There are many other considerations like conservancy charges, utility bills, parking fees if your drive, transportation cost, neighbourhood, parent’s proximity, etc…
Before making your biggest financial decision, have a in-depth discussion with your spouse or spouse-to-be. The decision must be logical and sensible. It cannot be built on ‘feelings’ nor ‘we think we can’. Too many a time, it’ll destroy the relationship and result in undesirable consequences.
What are your top three financial considerations for buying your property? Share with us in the comment section below.