Believe it or not, my wife and I viewed a condominium on a Saturday, went back to see it a second time on Sunday and signed the option to purchase the following Tuesday. Crazy, but true. Crazy, not because the apartment was a bad idea, but because we didn’t do any due diligence at all! We got lucky and it worked out. However, I suggest you do some serious foundation work before you make your dream home a reality.
1. Start At The Start
Don’t fall in love with a property (i.e. decide to buy it and then work backwards to see if you can afford it). If you do that and it falls through, you are always going to feel like you missed out on your dream home. Instead, think through your how much you can afford for the down payment, how big a flat you need and a monthly repayment that won’t leave you stretched at the end of each month. These basic questions not only make financial sense but make your home hunt much smoother and easier. For instance, if your budget is $700,000 for a two-bedroom condo unit, some locations would automatically be eliminated. You can then spend your time productively by looking at houses that you are more likely to buy.
2. It Is OK To Move In Planning To Move Out
Another common mistake is, we hardly make plans for the next home. More than half of homeowners end up buying more than one home in their lifetime. Granted, it is hard plan for the rest of our lives. It doesn’t mean you can’t ask yourself some simple questions.
- Do I intend to upgrade to a private property (if your first purchase is an HDB flat)?
- Do I plan to have kids and need a bigger place in a few years’ time?
- Is there even a remote chance that I may want to take a sabbatical or even a further degree that would mean giving up my job?
- Am I thinking of changing jobs that would have an impact on my salary?
Asking yourself these questions help you ensure you don’t overcommit to your first property (e.g. buy a 3-bedroom unit when a two-bedder would have sufficed).
3. Take the Total Debt Servicing Ratio (TDSR) seriously
The Total Debt Servicing Ratio (TDSR) was implemented by the government to prevent Singaporeans from being over-extended in terms of credit. Banks are required to be very thorough with every application and ensure they meet the TDSR requirements. Gone are the days of simply stating rough figures of your other financial commitments, or sometimes not even not declaring them. Today, you need documentation for your housing loan to be approved. In a nutshell, here’s how the TDSR works, assuming your monthly income is $5,000:
- The TDSR is set at 60%. So, the maximum amount you can use to settle your outstanding loans is $3,000
- You need to calculate the payment of all your loans – home, car, credit cards, renovation, student and overdrafts
- If your monthly loan commitments exceed $3,000 before applying for a home loan, you don’t even qualify for a home loan!
- If your monthly payments are $1,000 (car), $600 (overdraft), $300 (credit card), $100 (student loan), you only have $1,000 for your monthly home loan repayment
- So, you can only borrow an amount that keeps your repayments under $1,000 a month
4. Types of Loans
This is the easy part. There are basically two types, fixed and floating:
Fixed rate packages charge a flat interest for the first few years (current average is about 2.15% p.a.) The rate stays locked-in regardless of market conditions. If the interest suddenly shoot up, you are protected from the higher rates. Of course, if the rates drop, your still pay the higher rates. The HDB Concessionary Loan can also be considered a fixed rate loan, since its interest rate of 2.6% hasn’t changed for the past decade.
Floating rate packages work the opposite way. They are most often pegged to Singapore interbank overnight rate (SIBOR) and are adjusted every 3 to 18 months (depending on the package you choose). The floating packages are typically about 0.4% 0.6% lower in interest rates compared to fixed rate packages. In simple terms, if you expect the rates to go up, you should take the fixed rate. If you think the rates will stay constant or drop a little, go with the floating package.
In reality, most banks no longer offer a purely fixed rate package in today’s rising interest rate environment. Rather, they typically offer a fixed rate for the first three years, before pegging the rate of your mortgage to SIBOR.
5. Don’t Underestimate The Impact Of Renovation And Other Costs
Unfortunately, it is rarely the case where renovation costs end up lower than you expected. Any number of things can go wrong; homeowners get carried away, unexpected issues (like burst pipes) and delays come up or contractors don’t fulfill their promises. Whatever the cause, the result is higher renovation costs. Think about your renovation budget before planning for your home loan. This way, an unplanned issue doesn’t leave you cash strapped. The issues might not even be renovation related. Perhaps your car needs to be replaced or there is a major medical expense. Therefore, you need to ensure you have a healthy cash buffer for the unexpected.
6. Protect Yourself Against The Unexpected
Illness, retrenchment, a disability or even a mid-career change can leave you exposed to a huge loan and monthly repayments. The easy solution is mortgage insurance whereby the amount outstanding on your home loan (or an amount close to it) is covered. So, as the home loan reduces over the years, so does the pay-out from the policy. It is also important to have other insurance so that your family is adequately prepared should something happen to either of the main breadwinners.
7. Shop Around Before Deciding
For your home loan, that is, in addition to shopping for your dream house. The process is – compare your home loan options, apply for a home loan, submit all the relevant documents and get an in-principle approval from the bank. Only then should you commit to buying a new home. Apply with a few different banks as the rates may vary slightly and they usually offer different incentives. Sometimes, a bank you prefer may reject the application. So, it is important to have back up options.
You Are All Set
The most important part of buying a home is the planning. Spend as much time as you can on thinking about every eventuality. And when you eventually move in, all you have to do simply enjoy your dream home.
If you found this article helpful, 99.co recommends 9 milestones to hit before you buy your first condo [July 2018 update] and 9 biggest time-wasters when buying a resale flat
This article was first published on SingSaver.
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SingSaver is Singapore’s #1 personal finance comparison platform. Launched in May 2015, SingSaver is committed to helping Singaporeans find the right credit cards, personal loans, and other financial products with easy-to-use self-serve comparison tools. In a constantly changing financial landscape, SingSaver strives to provide the most up-to-date accurate data and personal finance guides. Our mission is not only to help Singaporeans find the right financial products, but to empower everyone to make sound financial decisions.
If you’re ready for your dream home, you can also find it on Singapore’s largest property portal 99.co.