Being a first time homeowner is like getting on a roller-coaster ride, or booking the cheapest possible hotel on Trivago – equal parts of exhilarating excitement and sheer terror. Some of us can’t owe the bank a huge sum of money (a mortgage with six figures), and still be able to go to sleep comfortably at night. We spoke to some new homeowners, and observed the psychological effects a first time homeowner should brace him or herself for:
#1: Your brain refuses to acknowledge the debt
Much like Donald Trump, some people refuse to acknowledge debt once the sum involved is big enough. This is made a lot easier by the fact that (1) you can use your CPF to pay for the monthly repayments, which would otherwise make you soil your pants every time you see the statement of accounts, and (2) most of the shocking downpayment has been “obscured” (read: out of sight, out of mind) when you use your CPF.
If you have an HDB loan, it’s even easier to ignore the money being deducted from your CPF. An HDB loan can cover 90 per cent of your flat price, and the remaining 10 per cent can come from CPF too; this means youliterally take more money out of your wallet to pay for a kopi-peng than for an HDB 5-room flat.
While it’s psychologically comfortable, it makes you oblivious to certain things. Such as – you still have a six figure mortgage to service! So you need to be painfully aware of this; only then can you make the right contingencies in terms of financial planning.
Norah, a 32-year-old accounts executive, bought a resale HDB flat three months ago. She shares with us her experience:
“Because I didn’t have to think about it, I didn’t pay attention. One day my friend lost her flat, and that got me thinking. I realised that if I lost my job for some reason, I wouldn’t be able to meet my mortgage obligation beyond a month or two. It was only then that I started to think about implementing a regular savings plan.”
Yi Fang, a private tutor who bought an executive condo (EC) in 2016, says it’s tempting not to look at the CPF statement:
“I wouldn’t even open the letter. It was only when my first child was born that I started taking note of how much the house really costs, and decided that we needed to save more. Otherwise we wouldn’t think about it at all.”
Here’s a bit of reassurance: there’s the Home Protection Scheme (HPS) for HDB flats, that covers your share of the mortgage up to the sum assured in case you’re dead, terminally ill, or permanently disabled. Private homes can use Mortgage Reducing Term Assurance (MRTA) for the same purpose.
But insurance doesn’t cover situations say if you were fired, or made redundant due to your employer going bust. So you need to draw up a savings plan for emergencies, which includes mortgage repayment. If you don’t know how much you’re paying for your mortgage right now, you need to check on the figure pronto; ideally, you should save enough to cover the mortgage loan for six months without income, whether through your CPF (by way of voluntary top-ups), or in cash.
#2: You decide there’s really no need to save or invest in anything else
Considering most mortgage loans come up to a four-digit figure every month, you might decide there just isn’t room for any more saving or investing. Sometimes that’s literally true; but even if it isn’t, it’s sure tempting to just decide: “You know what? This $1.8 million condo is the retirement plan, and the rest of my monthly pay cheque is going into my Amazon fund!”
Henry, a sales designer who bought an EC in 2016, says:
“There’s just this feeling that so much is already being spent on the house. There’s no way to save or invest much more. So I may as well treat the house as my retirement asset.”
Henry understands why this is theoretically unsound for all the following reasons – the need to diversify and not put all your eggs in the real estate basket; the inconvenience of downgrading and moving in your twilight years etc.
But there’s a tendency to decide that saving and investing small amounts, of say $200 or $300, is pointless. It can’t make much difference, so you may as well spend it and count your mortgage payment as your “financial prudence” for the month.
Now we’re not certified financial advisers – we won’t tell you this mindset is wrong. But if you want to treat your house as your sole retirement asset, talk to a financial planner about it. Most of them will explain the danger of not diversifying your assets, or how even a few hundred dollars invested or saved monthly can make a good financial safety net.
Also, brace yourself for temptation. There’s a strong proclivity to taking the easy way out and deciding your mortgage payments justify you squandering the rest of your pay cheque.
#3: You will start to spend money on finishings you once swore were stupid
Do you think $300 uplights are an absolute waste of money? Do you think people who use vinyl instead of parquet are making a wise decision? We’ll clue you in on two things: first, you’re absolutely right. Two interns are this close to losing their sight by typing under some “beautiful ambient uplight”; parquet flooring is only for people who also believe their contractor will get it done “in a week”.
Secondly, and you’ll want to sit up and pay full attention now – you’ll probably forget all that when you buy a house. It’s only easy to make such observations when you aren’t the one actually buying the house.
Henry says, “When it’s your house it’s different. It’s not like when I was renting; then I didn’t care how the living room looked, or what laminate the doors were clad in. But there’s a sense of owner’s pride when it comes to doing up your own house. I admit I spent a lot of money on things I would have called wasteful before.”
Josephine, a business owner in her 30’s, bought a condo just last month. For the past three years, she rented a room in a HDB flat. She admitted, “Before this, I thought it was unnecessary to have a pool, a nice view, and all that jazz. I prided myself on how I could live without any of that. But when the time came to put my money where my mouth was, the pool and view suddenly became important; I couldn’t bring myself to put down money for something I couldn’t take personal pride in.”
Right now it’s easy to decide you “just need $5,000 to furnish your whole house”, and you don’t care if the bed frames look like cast-offs from Changi prison. Do yourself a favour – save up in advance and plan for a bigger renovation budget anyway. That will save you taking out a high-interest renovation loan later, should you change your mind.
Did you find this article useful? Check out our related article on 5 costly home loan myths home owners always get wrong!