Dual-income families in Singapore should pretend they’re not, when it comes to buying a flat or condo. You want to insurance against situations like retrenchment, illness, business failure, etc.? This is the insurance, next to having the actual policies. Here’s why:
When you assume your dual-income situation will carry on, you’re taking a huge risk
Let me give you an example. Say you and your spouse both earn $4,000 a month, which is typical among Singaporeans right now (our friends at Seedly have some more details).
Say you both team up to buy a house, with your combined $8,000 a month income. Now under the Total Debt Servicing Ratio (TDSR), your loan is curbed at 60 per cent of this monthly income (inclusive of other loans like car loans, personal loans, and so forth).
Assuming you won’t have any other debts besides this home loan, this means your monthly loan repayment can be as high as $4,800.
What can you buy with that?
On paper, you can afford to buy a condo worth $1.4 million
The maximum loan for such a condo (75 per cent of price, straight from the developer) is $1.05 million. On a 30 year loan at 3.5 per cent per annum, this is a monthly repayment of close to $4,800. Congratulations, you and your spouse qualify.
On top of that, the actual interest rate – at least at the time of writing – is lower than the rate used to calculate TDSR*. It’s actually around two per cent right now, so your real monthly repayments are just $3,800 per month.
With both you and your spouse paying it, that’s about $1,900 a month per person. That seems pretty tight to me, though perhaps you can cope. But what happens if one day, your spouse becomes unable to work?
I’m not talking about death (as you would hopefully have life insurance or mortgage insurance that can cover that) – but consider the impact of retrenchment, being forced into a lower paying job, or being medically unable to work for a prolonged period.
Given that you earn $4,000 a month individually, how are you going to take over the monthly payment of $3,800, and still have money left over for groceries, maintenance fees, taxes, etc.?
*The medium-term interest rare of 3.5 per cent is used when calculating your TDSR, not the current rate of your loan package
This situation is worse if it happens within the first three years of buying your property
Remember that in Singapore, you have to pay the Sellers Stamp Duty (SSD) on property sold within the first three years. This is:
- 12 per cent tax if sold within the first year
- Eight per cent tax if sold within the second year
- Four per cent tax if sold within the third year
If you’re forced to sell within the first three years, due to inability to service the mortgage, the financial damage is devastating. Your losses can also be compounded if you’re forced to sell quickly (e.g. your agent has no time to get you a better deal), and if you’ve already spent a significant amount on renovation and furnishing (these probably won’t “pay for themselves”, especially if you need to fire-sale the home).
Consider the difference, if you buy as if you were a single-income family
Under these circumstances, you would buy an HDB flat instead of a condo.
A typical five-room flat (which is likely bigger than a $1.4 million condo unit) might go for around $550,000. At the HDB loan rate of 2.6 per cent*, for 25 years, your monthly loan repayment is just around $2,245. This has a number of implications:
- The family has one added safety net, beyond insurance policies
- The savings, if managed well, means you can safely afford a condo at some point
- You have fewer opportunity costs
- You have more holding power
1. The family has one added safety net, beyond insurance policies
Look, not to deride insurance, but sometimes cases fall through the cracks. Unemployment insurance only pays out up to 75 per cent of your income, for a limited time (less if you opt for lower premiums). Disability income has certain requirements to meet, like being unable to perform a certain number of Activities of Daily Living (ADL) – if you’re not disabled enough there may not be a pay out (horrifying thought, I know).
In situations like that, the last resort could be having the other spouse start work. Even if the resulting income level is lower, it’s still a safety net in desperate situations.
2. The savings, if managed well, mean you can safely afford a condo at some point
Consider if your spouse were to save or invest $1,900 a month, instead of putting it into the same condo unit with you. Over a period of five years (the duration of your Minimum Occupancy Period), growing at just three per cent per annum, this is over $121,000.
Coupled with the sales proceeds from your flat, which has likely appreciated, you might then be in a position to safely upgrade to a property such as an Executive Condominium (EC).
This will let you a buy a condo without walking a financial tightrope, wondering if you could end up selling at any time.
3. You have fewer opportunity costs
In the event you have children, or one of you wants to seize an opportunity (e.g. start your own company, take time off to be a full-time student and upgrade), you have the opportunity to do so. One of you can hold down the fort for a prolonged period, while the other takes care of business.
If you’re both cash strapped and struggling to pay the mortgage, however, none of this will be an option. And 25 to 30 years is a long time to be tied up this way.
4. You have more holding power
From a more investment-minded perspective, an affordable home means you have holding power. If you need to sell at some point, it will be on your time and your terms. You have the luxury of rejecting buyers until the next ice age if necessary, or till you get an offer you’re happy with.
This doesn’t happen to buyers who are over-leveraged: if you can’t afford the mortgage in a few more months, then you need to sell fast; even if the prospective buyer’s offer sounds more like it’s for a used Honda than your home.
So seriously, even if the both of you are working right now, consider buying as if one of you isn’t
It may mean you don’t get to live near Orchard or have a swimming pool for a while; but that kind of stress pales in comparison to 25 to 30 years of worrying over a mortgage.
Would you buy as if your spouse wasn’t earning? Voice your thoughts in our comments section or on our Facebook community page.
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