Buying a home is probably the biggest financial commitment any family will make in their lifetime. For first-time homebuyers, it is important that you buy a house that you can afford, and not spend beyond your means. Here are some questions that aspiring homeowners should ask themselves when planning for their first property purchase.
How do I choose a home I can afford?
You should ensure that you have the ability to service your home loan instalments with your income, especially since this is a long-term financial commitment. Under a limit known as the Mortgage Servicing Ratio (MSR) imposed by the Monetary Authority of Singapore (MAS), HDB or Executive Condominium (EC) buyers can use a maximum of 30% of their gross monthly income to repay their home loans. Private homebuyers should also use the 30% MSR as a guide to keep their repayments affordable.
What’s more, the total value of loans that a financial institution can offer a customer cannot exceed 60% of their gross monthly income less any outstanding debts that they may have, a limit known as the Total Debt Servicing Ratio (TDSR). The outstanding debts include credit card balances (including “instalment plans” with retailers), student loans, personal loans, car loans and other home loans (if applicable). The TDSR was implemented to prevent homebuyers from being financially overextended because of a property purchase beyond their means.
One other benchmark to determine whether you are spending within your means is whether the property you plan to buy can be fully paid-up by the time you retire. When your mortgage is fully repaid, it is one major expense less to worry about in your old age.
If you need some help with budgeting for your first home, try using the Our First Home calculator to estimate a housing loan and property price based on your income!
How else can I reduce the cost of buying a home?
There are housing grants available for buyers of Built-to-Order (BTO), resale HDB flats, or ECs.
Here are some of the housing grants available for first-time buyers:
How much of my CPF savings can I use to help pay for my home?
You can use the savings in your CPF Ordinary Account (OA) to pay for your home, but there are also some expenses that you will have to pay in cash. Here’s a quick reference on the costs that you should keep in mind:
However, there are limits on the amount of CPF savings you can use for your flat. You can use the CPF Housing Usage Calculator to calculate this amount, or check how much more of your OA savings you can use for your home purchase under the “Property” section on your CPF statement.
Should I use up the savings in my CPF OA to pay for the house?
If you are using a loan from HDB to finance an HDB flat, you can now choose to retain up to $20,000 in your OA. Previously, flat buyers had to use all the funds in their OA before taking on an HDB loan. The amount that is kept in the OA can be used for monthly mortgage instalments in times of need, or help improve retirement adequacy if left unutilised. One tip to maximise OA savings that you do not need for your housing would be to transfer that amount to your Special Account (SA)^ to earn a higher interest of up to 5%* per annum!
Using your OA savings for your monthly mortgage instalments will leave you with more cash to spend on expenses not payable with CPF, such as home renovation costs. However, if your source of income is disrupted, you may not have enough back-up funds to pay for your house. You will also miss out on growing your savings at an attractive interest rate of up to 3.5% p.a.* in your OA.
Besides that, it is important to note that less CPF contributions are allocated to your OA as you get older, and this may affect your ability to continue paying your monthly home loan instalments with your OA savings.
^ For members below age 55 and up to the current Full Retirement Sum only. Members aged 55 and above can transfer their SA and OA savings to their Retirement Accounts (RA), up to the current Enhanced Retirement Sum.
* Includes extra interest, which is paid by the Government, on the first $60,000 of a member’s combined balances. Read more about CPF interest rates here.
Spending what you can afford when it comes to buying your first home will keep your debt within acceptable levels and not put a strain on your finances. This will help ensure that you are able to service your monthly repayments comfortably, while leaving you with sufficient funds for other non-home related expenses. It also means that you will have paid off your home loan by the time you retire, providing you with greater financial security in your golden years!