Considerations before buying your property in Singapore
Having served multiple buyers for the past few months, I realised that while most buyers know the basic requirements such as the loan and down payment for buying a home, they may not be aware on other in-depth requirements, i.e. other considerations when purchasing a property.
The situation resonates with me as I was also once a first-time buyer! The information was not as readily available as compared to now, there were so many unknowns!
These points are usually shared to my clients as part of the property wealth planning discussion and I hope that it would be beneficial to you as well!
1. ALWAYS buy within your means.
Buy within your means is my motto and also a principle. It is essential to buy within your means, especially if it is a home. You may be able to get a high mortgage loan due to your salary and wanted to buy that dream home due to its lush fittings, amenities or proximity to MRT. However, it is essential to be prudent and do the proper financial calculations in-depth before even proceeding with the purchase. The last thing you want is to get into unforeseen circumstances such as loss of income, and you find it extremely difficult to sustain the monthly mortgage instalments.
2. Safety net
A safety net means backup funds, either in cash or CPF, in continuing to service your monthly mortgage instalments. You can use the safety net in times of crisis, such as the current COVID-19 pandemic or black swan events where people lose their jobs or lose their source of income due to other reasons. Having a safety net will allow you to service the monthly mortgage instalments while searching for alternatives. I would usually advise clients to have a minimum of 12 months of mortgage instalments before committing to their purchase.
3. Debt-free (TDSR/MSR)
The Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) are gauged based on salary and other factors such as car loans, property loans and other loans, which would affect the loan amount eligibility as well. In relation to point 1 and 2, the best recommendation is to stay debt-free from loans before you commit to your property purchase. Having an outstanding loan in one form or another would result in a lesser loan amount eligibility.
4. CPF usage
CPF funds are commonly used for the down payment for a property purchase as in some cases, for the buyer stamp duty as well. It is common to use CPF to service monthly mortgage instalments as well. It is important to note that upon the usage of CPF funds for property, accrued interest would commence and that would need to be returned together with the total amount used to service the mortgage instalments and down payment, upon the sale of the property.
5. Maintenance fee/ Service and Conservancy Charges
Private properties pay maintenance fees to their appointed Management Corporation Strata Title (MCST) agency while HDB will pay service and conservancy charges to their town councils. These funds are used to upkeep the estate and would be required to be paid monthly.
6. Credit Rating By Credit Bureau Singapore
Bank Loan eligibility does not gauge on salary and CPF contributions alone. The banks would also run a credit rating check to assess your credit score before determining the loan amount. Credit score ranges from AA grade, which is the best to HH, which is the lowest. The credit score table from Singapore Credit Bureau is as attached.
The credit score assessment comprises of many factors, and you can read more at https://www.creditbureau.com.sg/credit-score.html.
7. Insurance – Home and Personal
As mentioned in the safety net segment, unexpected events such as Illness, retrenchment, current covid-19 black swan events, can leave you tied down with a huge loan and monthly mortgage payment. It is essential also to consider purchasing mortgage insurance as well as personal insurance so that your family is prepared, should anything happen to any of the breadwinners/owners.
8. Interest Rates – Stress test
HDB loan interest is fixed at 2.6%. However, for bank loans, there are different kinds of loans from Fixed Rates to SIBOR and the eventual SORA, and the rates are all different with varying requirements. It is essential to do a stress test with higher interest rates than current interest rates which would give a very good indicative on your financial threshold.
9. Retirement planning
Last but not least, a property is a big-ticket item and not only does it offer you a roof, it can also be a very vital component for your retirement planning in the future.
If CPF had been used to service the monthly mortgage instalments, you would need to monitor the total CPF amount with accrued interest, against that of the current market value of the property. Doing that would allow you to determine on a probable timeline to take action and sell off the property.
Another aspect to consider is to explore options on unlocking dormant capital in your current property. It may be more beneficial to sell off your HDB and upgrade to a bigger unit or even take out an equity loan on your existing private property.
There are a lot of options worth considering if you are mindful about saving up for your retirement!
The list of considerations is non-exhaustive and only offers a glimpse of the crucial factors that may affect your property purchase. I hope this allows you to be more informed and eventually make the right decision on your property purchase.
You can read more about other real estate articles such as TDSR/MSR (https://www.homeadviser.sg/post/total-debt-servicing-ratio-tsdr-mortgage-servicing-ratio-msr) or how does CPF Accrued interest can affect your property (https://www.homeadviser.sg/post/how-does-cpf-accrued-interest-affect-your-property).
If you would like to know more about the information shared and is wondering about how this may affect you, please do leave a message at my email, firstname.lastname@example.org or +6592767874.
More than happy to share more with you!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organisation, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.