Tips On Paying For Your First Home

10 Aug 2014 
SOURCE: Alvin Foo

Be financially prepared for any surprises

Buying your first home is likely to be the most expensive and daunting purchase you will make in your life.

Of course, it is nowhere near as simple as shopping for clothes or groceries, but don't get too worried. It is not rocket science either.

Sit down and take a methodical approach to ensure you do not get in over your head.

Factors such as location, affordability, cash flow and home financing are key considerations, say experts.

With Housing Board flats in mature estates easily costing above $400,000 and even a modest condo unit being priced at $1 million or more, this purchase involves big money.

"Buying a home is a long-term financial commitment... Before committing to a home purchase, we encourage home buyers to do their sums," said Mrs Nyang-Ngiam Su Ying, the Central Provident Fund Board's senior deputy director of housing schemes.

Sunday Invest invites some financial experts to offer tips on paying for your first home.

Do your sums first

Financial advisers say you should plan your housing budget carefully before choosing your home and not the other way around.

There are many tools available out there which first-time home buyers can use to plan their purchases. For example, Mrs Nyang-Ngiam said, "they can make use of Our First Home Calculator available on the CPF website to assess the type of housing they can afford based on their income and ability to service the loan".

Ms Tok Geok Peng, DBS Bank's senior vice-president of consumer deposits and secured lending, said: "We encourage them to plan early to improve their borrowing ability."

The experts also urge would-be buyers to consider the full range of costs and monthly bills prior to purchase.

"Once you own the property, you will also incur other regular costs like utility bills, conservancy fees and management fees if your property is a condominium with facilities like a swimming pool, gym and tennis court," said Mr Vasu Menon, vice-president of wealth management in Singapore at OCBC Bank.

He added that the property may also require repairs and this will add to the cost of maintaining the unit.

Other miscellaneous costs include property taxes and fire insurance premiums, said Ms Chia Siew Cheng, United Overseas Bank's head of secured loans.

Save and invest before spending

Saving for the down payment could take several years for most people, given the steep rises in property prices in recent years.

Property down payments for first-timers could range between 10 per cent and 20 per cent of the purchase price, depending on whether you buy an HDB flat or a private property and whether you finance this using an HDB loan or a bank loan.

"Save at least 10 per cent of your income each month and do this before you even start spending," said OCBC's Mr Menon.

He added that home buyers will need to build up a pool of funds through savings and investments.

"In order to do this, save diligently once you start working and look to invest your savings to grow your funds," he advised.

You could also have a regular savings plan to accumulate cash for a down payment and actively manage your debt, said DBS' Ms Tok.

HDB loan or bank loan?

First-time buyers should consider several factors before signing on the dotted line for home loans.

One common question is whether to get an HDB loan or to borrow from the bank. They have their pros and cons.

For instance, a bank loan requires a cash down payment of at least 5 per cent while an HDB loan allows full financing of the down payment using just CPF funds.

HDB loans tend to offer better interest rate stability, as the rate is pegged at 0.1 percentage point above the prevailing CPF interest rate. Thus, they provide relatively more stability than even a fixed-rate mortgage whose rate is fixed for only a certain number of years.

But HDB loans also come with certain eligibility conditions. These include salary ceilings on the average gross monthly household income - and at least one of the buyers must be a Singaporean.

Home buyers should also evaluate the impact of regulations on their financing options and costs, say the bankers.

Some may still be unaware of - or do not understand - the total debt servicing ratio (TDSR) framework for property loans that was introduced last year, noted UOB's Ms Chia.

She said: "According to a recent survey, the top two uncertainties home buyers have under the TDSR rules were how the existing cooling measures affected their loan applications and how the framework applies to their personal situations."

The TDSR caps a borrower's monthly total debt repayments at 60 per cent of his gross monthly income.

Beware of likely interest rate hikes

A key financial consideration at this juncture is the outlook for interest rates, say the experts.

That is because the United States Federal Reserve is planning its exit from a loose monetary policy which has kept interest rates near zero over the last five years.

"While rates are low for now, remember that they may rise in the coming years," said OCBC's Mr Menon.

"When rates do increase, your monthly instalments will rise, and you should assess if this will pose a burden before deciding on the amount of loan you plan to take and the package you wish to sign up for."

Home buyers should also set aside sufficient funds to meet rising interest rates and any unforeseen circumstances.

UOB's Ms Chia pointed out that for every one percentage point rise in the interest rate, the monthly instalment will rise by about $250 for a $500,000 loan stretched over 30 years.

"Ideally, home buyers should have a holding power of at least two to three years and ensure that monthly loan repayments are not more than 35 per cent of the gross monthly household income," she said.

To ensure financial liquidity, it is also prudent for home buyers to maintain 18 to 24 months of monthly instalments in their bank accounts, she added.

Background story

When financial planner Eileen Chan and husband Alvin Tan were considering housing options in 2009, they went for a Build-To-Order (BTO) flat in Sengkang over a resale Housing Board home near their parents.

Ms Chan, 31, tells Sunday Invest: "We were not so keen to pay the cash over valuation (COV) then, especially the high COVs in the popular estates where our parents live in Serangoon and Tampines."

That led to them securing a four-room BTO flat in Fernvale for less than $200,000 during a balance of sales exercise.

"Fernvale is an ideal location due to its proximity to the CTE and TPE, and it's only a 15- to 20-minute drive to either of our parents' place," she adds.

There are pros and cons of opting for a new Housing Board flat over an older apartment in a mature estate.

"BTO flats are generally smaller, and there is also a limited number of public buses serving our area, so friends visiting us who do not drive may face a little inconvenience," says Ms Chan.

However, they can "enjoy the tranquillity of a non-mature estate", and also see the estate grow as new developments and amenities sprout.

"We even had a pleasant surprise when we learnt a couple of years back that a new mall will be built just a stone's throw away from our home," says Ms Chan, who has a 15-month-old son, Luke.

She advises first-time buyers to plan their budget well.

Ms Chan says they can meet their monthly home loan payments entirely from their Central Provident Fund savings.

She adds: "All the additional funds from our salaries are freed up for other expenses and investments, and also for our son's expenses."

Alvin Foo​

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