Paying For Your First Home

It is many Singaporean’s aspirations to own a home in Singapore, and looking at the home-ownership statistics, the country’s government has done well to fulfil a large part of this dream.

However, as home prices climbed dramatically in the last few years, it has increasingly become a scary thought to buy a property here. “What if interest rates increase? What if I can’t service the mortgage due to a retrenchment?” These questions become common reminders in our head, asking us to think twice and be extra cautious when we want to buy a property. While the financial commitment is definitely huge, you can prepare for it so that owning your own home can become a reality. So here’s Enjoycompare’s 3-step guide to help you be ready when the time comes!

Do Your Sums

We can’t emphasise this enough. Even before you start going for viewing, you should sit down and have a good look at your finances so that you can determine the type of place you can afford. There is no lack of free tools available for you to determine the amount of money you need for your first home. You can start by using CPF Board’s Our First Home Calculator which gives you a pretty good idea about the amount you can afford based on you and your partner’s income and available funds.

You will also need to consider the new loan limits implemented in 2013 due to the cooling measures. These are the Mortgage Servicing Ratio(MSR) and the Total Debt Servicing Ratio(TDSR). For HDB homes, the MSR caps the amount that may be spent on mortgage repayments to 30 percent of the borrower’s gross monthly income. The requirement for TDSR is 60%, but this takes into account all types of debts you might have, including those such as credit cards and car loans.

You will also need to look at the available funds in your CPF that can help you service your mortgage financing. CPF funds in your ordinary account can be used for a number of purposes, such as paying the downpayment for the purchase of a property, repaying the monthly home loan and paying for the associated fees like legal fees, stamp duties.

Another important thing to note is the downpayment required for the purchase of a property. For a private property, you need to pay a downpayment of at least 20%, out of which 5% has to be cash. The remainder can be either from your CPF savings or a mixture of cash and CPF. If you are taking a HDB loan instead, you will only need to pay a downpayment of 10%, of which 5% has to be in cash.

For those who are looking at buying a HDB, look out for the grants available to you as well! They are well-worth your time researching as these grants can save you some 5-figure sum easily. You can find the types of grants and subsidies available here.

Have Enough Savings

Many Singaporeans go through Step 1 and neglect the fact that even if they can afford the initial costs of home ownership, other costs can crop up later. Costs such as renovation can be another 5-figure sum you need to think about. As you pay your monthly repayments, take into consideration that servicing the loan doesn’t become a huge burden to you. You should still be able to live and save comfortably.

You need to have some emergency funds to tide you over any period of emergency/cash flow problems. A good gauge for an emergency fund will be saving at least 6 months’ worth of your salary.

Know that if for some reason you cannot service your mortgage loan, your family and you could lose the roof over your head. You might want to think about some expected expenses at least in the next 5 years, such as a possibility of having a baby, unexpected medical expenses or a possible retrenchment from your company. If you have dependents, you may want to consider taking up a mortgage insurance as well – it will save your family from having to pay for the hefty monthly repayments should something unfortunate happen to the loan borrower.

Choose A Loan Wisely

Choosing a home loan is an important part of buying a property. With so many types of loans available, you should spend some time researching and understanding the different types and which ones are suited to your needs.

Remember that a cheaper loan is not always the best choice. You will need to consider your circumstances – do you want predictable payments or prefer a floating rate that could be slightly cheaper? Do you prefer a loan pegged to the Swap offer rate(SOR), which is more volatile but can capture lower rates should interest rates fall?

In order to take advantage of cheaper rates, you should also monitor the interest rates to ensure that you can refinance after the lock-in period. Refinancing or repricing your loan after the lock-in period might allow you to get cheaper repayments so make sure that you remember to do that. If you are considering repricing down the road, ensure that your current bank loan comes with a free repricing option.

Take note of the fine prints as well, such as any penalty fees related to refinancing within the lock-in period, clawback of benefits and other related fees should you decide not to stay with the loan.