Property is a great investment, because it’s not like this whole country that is only one island has a lot of space. By 2060 it will probably take a 25-year mortgage just to pay off your parking space. That said, overhyping the whole “property is great” angle leads to a lot of hasty mistakes:
1. Dabbling with shoebox apartments
If you’re still living with parents, and have a high ventnough income, you might be tempted to play landlord by buying a shoebox apartment. In theory, it seems like a good idea: buy a luxury 500 square foot or smaller unit, and then rent it out to expatriates for side-income.
The problem is, you now become the owner of private property. As in, you are no longer eligible to buy a HDB flat. And since you have an outstanding property loan in the form of that shoebox unit, you will only get 60 per cent financing on your next property loan – so buying a second house is usually out of the question.
So what happens if, before the 25-year loan on your shoebox is up, you decide to settle down and raise a family?
You can’t do that in an apartment that can comfortably house maybe one Chihuahua. Owning a shoebox means marriage and children will have to wait until (1) you finish paying off the shoebox and can buy another property, or (2) you sell off the shoebox, and find something bigger.
The problem with option (2) is that you don’t know what the property market will be like. If it’s during a downturn, you might sell at a loss (If you sell right now in Q1 2016 and don’t make a loss, I will accuse your property agent of being a witch.)
I understand the temptation to invest in property as soon as possible – but when it comes to shoeboxes, make sure you have somewhere viable to stay, or that you’re dead certain you won’t be settling down any time soon, before buying.
2. Signing the OTP before getting loan approval
This is a ridiculous mistake, which still manages to happen about three or four times a year. If you have never bought a house before, please pay close attention here. I’m about to potentially save you a few thousand dollars:
When you buy a house, the first step is to sign the Option to Purchase (OTP). This is a non-refundable deposit. It’s usually 1% of the property’s agreed purchase price. On a $1 million unit, for example, you would look at a deposit of $10,000.
Once the OTP is signed, you have three weeks to exercise the Option (make the rest of the payment), or 25 per cent of it is forfeited. In the above example, if you don’t buy the house within three weeks you’d flush $25,000 down the toilet.
This means you need to have Approval in Principle (AIP) from a bank before signing the OTP. The AIP is a promise by the bank to give you the home loan you need, if and when you buy a house. Getting AIP is free, and AIP is usually valid for up to two weeks.
So it’s simple: get the AIP first, so you know how much a bank has pledged to lend you. After that, sign the OTP, and get the bank to give out the loan.
If you sign the OTP first, and then find out the bank won’t give you the loan, you’ve pretty much lost the deposit.
3. Get a personal loan for renovations
A lot of Singaporeans still don’t realise renovation loans exist. Because of that, they often like to take out personal loans to pay for interior design.
The typical personal loan has an interest rate ranging between six to nine per cent per annum. The typical renovation loan has an interest rate of around three to five per cent per annum.
And in some cases, banks have promotions – you might be able to get an interest free renovation loan (usually interest free for six months.)
So if you have just bought a house, and seek to renovate, don’t furnish with a personal loan. Start with a renovation loan, and tell the contractor or interior designer the budget is 20 per cent lower than that loan (they typically bust the budget by 20 per cent.)
In the off chance that the renovation loan won’t cover everything, you can get a personal loan to make up the difference. Or maybe just decide that some things are more important than parquet flooring, such as feeding your children for a year.
4. Ask the mortgage broker first…
Finding the right loan is important and while your well-meaning friends, family and other parties may try and tell you which loan is right for you, its worth getting some expert advice on the matter.
By expert, I am talking about a mortgage broker, and no one else. The thing is, banks offering home loans often have people indirectly working for them in the sense that they get referral fees when they direct a customer to them. That’s not entirely in your interest, since you may be steered towards an expensive package if the banker pays out a bigger referral fee.
There are mortgage brokers who will – as a free service – compare the current home loan packages and find you the cheapest. And bear in mind, a difference of 0.1 per cent in your home loan can mean a difference of a few thousand dollars at the end of each year.
So if you are still hunting for a loan, ask the mortgage broker first.
5. Buy overseas without checking the developer’s history
Singapore has stringent regulations on developers – other countries may not. First time buyers of overseas property often miss this: they check out the site, they check out prices in the neighbourhood, and they factor in the amenities. All the basics of buying property.
What they don’t check is the developer’s background; we’re not used to doing that, because in Singapore we can safely assume the developer isn’t a fly-by-night. But let’s just say property developers are allowed more leeway in some other countries (no finger pointing.)
Common problems include:
- Developers not having sufficient capital to finish the project. They count on sales to fund the building, and if they can’t raise enough the whole thing is abandoned.
- “Ghost” properties which are half built, delayed, and eventually abandoned. This often happens as part of a tax evasion scam, or as a way to launder money. And if they can rope in some suckers along the way, they will.
- Sub-par developers, whose properties involve less concrete and more optimistic thinking. The maintenance costs are often unsustainable after the first three years, and by then they’ve fled or closed down.
Of course, checking the developer’s background requires some grasp of accounting (you will have to look at a balance sheet or two), and a bit of legwork. So if you’re not willing to do that, it’s probably a better idea to keep your purchases local.
(And hey, you can view some of the best property listings for free right now, on 99.co.)