Some comparison factors for your next purchase.
Believe it or not, my wife and I viewed a condominium on a Saturday, went back to see it a second time on Sunday and signed the option to purchase the following Tuesday. Crazy, but true. Crazy, not because the apartment was a bad idea, but because we didn’t do any due diligence at all! We got lucky and it worked out. However, I suggest you do some serious foundation work before you make your dream home a reality.
Start At The Start
Don’t fall in love with a property, decide to buy it and then work backwards to see if you can afford it. For one thing, if it falls through, you are always going to feel like you missed out on your dream home. Reverse the process. Think through your how much you can afford for the down payment, how big a flat you need and a monthly repayment that won’t leave you stretched at the end of each month. These basic questions not only make financial sense but make your home hunt much smoother and easier. For instance, if your budget is $700,000 for a two-bedroom apartment, some locations would automatically be eliminated. You can then spend your time productively by looking at houses that you are more likely to buy.
It Is Ok To Move In Planning To Move Out
Another common mistake is, we hardly make plans for the next home. More than half of homeowners end up buying more than one home in their lifetime. Granted, it is hard plan for the rest of our lives. It doesn’t mean you can’t ask yourself some simple questions.
Do I intend to upgrade to a private property (if your first purchase is an HDB flat)?
Do I plan to have kids and need a bigger place in a few years’ time?
Is there even a remote chance that I may want to take a sabbatical or even a further degree that would mean giving up my job?
Am I thinking of changing jobs that would have an impact on my salary?
These questions help you ensure you don’t overcommit to your first property.
Take the Total Debt Servicing Ratio (TDSR) seriously
The TDSR was implemented by the government to prevent Singaporeans from being over extended in terms of credit. Banks are required to be very thorough with every application and ensure they meet the TDSR requirements. Gone are the days of simply stating rough figures for your other financial commitments or sometimes not even not declaring them. You need documentation for every loan you may have. Here’s how the TDSR works.
Your monthly income is $5,000
The TDSR is set at 60%. So, the maximum amount you can use to settle your outstanding loans is $3,000
You need to calculate the payment of all your loans – home, car, credit cards, renovation, student and overdrafts
If your monthly loan commitments exceed $3,000 before applying for a home loan, you don’t even qualify for a home loan!
If your monthly payments are $1,000 (car), $600 (overdraft), $300 (credit card), $100 (student loan), you only have $1,000 for your monthly home loan repayment
So, you can only borrow an amount that brings keeps your repayments under $1,000 a month
Types of Loans
This is the easy part. There are basically two types, fixed and floating:
Fixed rate packages charge a flat interest for the first few years (current average is about 2.15% p.a.) The rate stays locked-in regardless of market conditions. If the interest suddenly shoot up, you are protected from the higher rates. Of course, if the rates drop, your still pay the higher rates.
Floating rate packages work the opposite way. They follow the market conditions and are adjusted every 3 to 18 months (depending on the package you choose). The fixed rate packages are usually about 0.4% 0.6% higher than floating packages. In simple terms, if you expect the rates to go up, you should take the fixed rate. If you think the rates will stay constant or drop a little, go with the floating package.
Don’t Underestimate The Impact Of Renovation And Other Costs
Unfortunately, it is rarely the case where renovation costs end up lower than you expected. Any number of things can go wrong – sometimes homeowners get carried away, unexpected issues (like burst pipes) and delays come up or contractors don’t fulfill their promises. Whatever the cause, the result is the same – higher renovation costs. Think about your renovation budget before planning for your home loan. This way, an unplanned issue doesn’t leave you cash strapped. The issues might not even be renovation related. Perhaps your car needs to be replaced or there is a major medical expense. Therefore, you need to ensure you have a healthy cash buffer for the unexpected.
Protect Yourself Against The Unexpected
Illness, retrenchment, a disability or even a mid-career change can leave you exposed to a huge loan and monthly repayments. The easy solution is mortgage insurance whereby the amount outstanding on your home loan (or an amount close to it) is covered. So, as the home loan reduces over the years, so does the pay-out from the policy. It is also important to have other insurance so that your family is adequately prepared should something happen to either of the main breadwinners.
Shop Around Before Deciding
For your home loan, that is. The process is – compare your home loan options, apply for a home loan, submit all the relevant documents and get an in-principle approval from the bank. Only then should you commit to buying a new home. Apply with a few different banks as the rates may vary slightly and they usually offer different incentives. Sometimes, a bank you prefer may reject the application. So, it is important to have back up options.
You Are All Set
The most important part of buying a home is the planning. Spend as much time as you can on thinking about every eventuality. And when you eventually move in, all you have to do simply enjoy your dream home.
This article was first published on SingSaver.com.sg