Property pitfalls to avoid when buying/financing a new developer unit

Knowing your finances when you are about to buy a new developer unit is paramount. In most cases, you will be borrowing from a bank to finance your purchase (unless you carry around a suitcase containing $1 million dollars while visiting show flats).  It therefore pays to know the property pitfalls to avoid when it comes to acquiring a property loan.

Know how much you can borrow and afford

It sounds simple but people trip over it all the time and get themselves into these property pitfalls. Let us walk through the steps you need to take.

• Cash: It must make up at least 5 percent of the transaction.
• CPF: Funds in the Ordinary Account (OA) can be used to make the downpayment

Cash and CPF must make up at least 20 percent of the purchase price as the maximum loan is 80 percent of the purchase price.

Golden Rules:

• Cash >5%
• Cash + CPF >20%
• Loan: Up to 80%

Having the means to pay upfront is just one part of the equation. Total Debt Servicing Ratio (TDSR) states an individual cannot be spending more than 60 percent of his income to service all of his/her loans.

For example:

Jim’s income is $5,000 a month. 60 percent of $5,000 is $3,000. Under the TDSR, the maximum debt repayment he can make a month is $3,000. If he has an existing car loan with an instalment of $1,000 a month, he can only take a loan where the monthly repayment is less than $2,000 a month.

Golden Rule:

<60% of your monthly income to service all your debts

Getting a loan from the bank

This property pitfall can make or break your purchase so we highly recommend you to engage a banker in the preliminary stages of your house search. The competition for home loans are now really stiff so you should really do your homework and compare.

Insider Tip:

Some take a walk around Raffles Place and visit the banks’  flagship branches to get the various loan packages on offer. Some banks don’t have mortgage services in their heartland branches, so it’s better to spend half a day at Raffles Place to get all the information you need. There are also various online mortgage brokers that you can visit to compare loan packages. 

Spend some time with the mortgage banker, let them run through your financials with you, fill up the forms and submit some income documents. The objective here is to get an In-Principle Approval (IPA), which states that the bank is willing to loan you this amount for your property purchase. IPAs have a validity period and caveats that there are no significant changes in your financial status during this period. This gives you a peace of mind when searching for your property, knowing that your loan amount is approved by the bank.

Golden Rule:

Make sure you get your financials sorted out before putting down a booking fee. Your booking fee is not refundable if your loan application is rejected!

Miscellaneous items

There are other expenses that may look small relative to the property price, but are pretty substantial when you look at them in isolation. Hence, they are important to consider in order not to fall into property pitfalls.

• Stamp Duty – $24,600 for a $1 million property, payable to IRAS, the local tax authority
• Lawyer’s Fee – The conveyancing lawyer plays an extremely important role in the transaction. The lawyer will handle your money and all the legal procedures, write in to the CPF so you can make use of the funds, liaise with the seller to make sure you pay them on time etc.. Lawyer’s fees typically start at $2,500 for developer units. More than half of the fees you pay the lawyers are for disbursements. This means they are spending money on procedures that you have to fulfil when buying a property! They don’t make a huge margin off this work, they have keep your files and follow up with you over the next few years!

Insider Tip:

Stamp duty and lawyers’ fees can be paid with your CPF funds. The lawyer will be able to take care of the whole process if you go along with this option.

Still unsure of what to expect? You can read more about the other costs involved when purchasing a newly launched unit here.