The purchase of a home is among the most involving financial commitment for Singaporeans. Being a long-term financial investment, you need to carefully plan it from the outset. Before going shopping, you must know how much you can afford to pay, and any other charges related to the buying process.
Take into account your current and future income as well as existing outflows and obligations. You may also include any savings set aside for this purpose and the loan amount that you qualify to get. When buying a home, there are payments to be made upfront, as well as monthly payments for loans spreading over a few years.
Upfront payments include the down-payment, which is a percentage of the buying price, option fees, stamp duty, legal costs, agent’s fees and/or commissions where applicable, among other miscellaneous expenses.
Monthly payments include installments for a housing loan/mortgage, mortgage reducing term and fire insurance premiums, management fees/conservancy charges, utility bills and property taxes where applicable.
Looking at your finances
You will be better served by getting a home that comfortably fits into your budget. In order to determine what this amount is, make a list of all your available resources. Most of your savings and other lump sum accumulations will go towards meeting the upfront payments, while your future incomes should be enough to cater for the monthly payments and expenses throughout the life of the property.
In Singapore, you cannot use your CPF savings to cater for monthly expenses like taxes, conservancy, insurance and management fees. Therefore, your income should be enough to support such payments, as well as your other expenses and financial obligations. If the loan you get is a floating rate loan, you also need to build a buffer to shield you from high interest rates in future.
Remember that if the value of your house falls beyond a point that chances the loan to value ratio of the housing loan you get, your financier will require you to pay up a lump sum to cover the shortfall and restore the ratio. You may have to use your savings for this.
It is recommended that you don’t use your entire CPF kitty towards financing your home. Remember that CPF contributions decline as you grow older. In addition, plan to have completed payments for the home by the time you retire.
Some of the resources available include:
- Your cash savings and cash equivalents which are commonly directed at upfront expenses.
- Savings in your CPF Ordinary Account.
- Sales proceeds from your current home where applicable.
- Your monthly income stream – salary, commissions and/or business income.
In your planning, only factor in the income that is sure. Do not include any commissions and/or bonuses that are not guaranteed.
Debt servicing ratio
The Total Debt Servicing Ratio is an important metric which demonstrates the degree to which your gross monthly income is used to pay for any debts and financial obligations. These include any monthly repayments made for your housing loan. The law requires that your TDSR be 60% and below, meaning that if you have more financial obligations and outstanding loans at the time of taking your home loan, you will get a very small amount, limiting your options.
Note also that if you take a bank or HDB loan to buy a HDB flat, your monthly installments for that and any other property loans being paid must not exceed 30% of your monthly gross income. Hence, even where you qualify to get a bigger loan, don’t take the whole amount unless you’re confident that you can fund it.
Taking a home loan
Home loans or mortgages are loans that are acquired specifically for the purpose of buying real estate property, the security of the loan being the property itself. The loan is repayable through monthly installments. Before you take up a home loan, make sure that you can afford to make the repayments, with all other financial obligations considered.
Ask the loan provider to give you a tentative repayment schedule to enable you to estimate the real costs. In addition, the lender is required to furnish you with a residential home loan facts sheet which enables you to better comprehend the terms of the home loan.
Properties which qualify for financing through home loans include direct procurement and reselling of HDB flats, and private properties which are under construction or have been completed. Your home loan comes at an interest rate which is charged from the date of the first disbursement. This is commonly the date on which the full purchase price for the property is paid (option fees and the down-payment come earlier). If the property owners allow for the purchase price to be paid progressively, the loan may be disbursed in installments also.
Your repayment schedule will give you a breakdown of the monthly installments to be paid throughout the life of the loan together with dates on which they must be paid.