With housing prices having risen by double-digit figures annually for the past several years, an increasing number of young Singaporean couples are finding that servicing a monthly housing mortgage has become increasingly challenging.
Compared to a generation ago, where Singaporeans could select an HDB flat for the bargain price of $70,000, those in their mid twenties to thirties buying a home for the first time today have to grapple with rapidly rising costs and ominous signs of a looming global recession on the horizon.
If you find yourself in such a situation, what can you do to best ensure you choose a flat within your means, and that your CPF savings are adequate to service the mortgage loan? Read on to find out the key financial considerations for making the home of your dreams become a reality.
1. Can You Afford the Downpayment?
Although property buyers used to be able to borrow as much as 100% LTV (loan to value) during the property boom, those days of liberal lending are long over, and home buyers today have to put up more cash and CPF before they can buy a home.
While first-time HDB buyers can still put down just 10% of the value of their flat and get a loan from HDB for the remaining 90%, those who choose private property or do not qualify for an HDB loan can only borrow a maximum of 80%. Furthermore, buyers of resale HDB flats have to fork out an additional COV (cash over value), which can amount to as much as $50,000, and has to be paid out to the seller in cash.
2. The LTV (Loan to Value) Ratio
After you have determined that you are able to come up with the downpayment, private banks will loan up to 80% LTV, while those who qualify for a HDB concessionary loan may borrow up to 90%. Although current bank interest rates may be lower than the 2.6% extended by HDB, experts generally advise first-time home buyers to go with the HDB loan option instead, as HDB rates are pegged to the CPF rates plus 0.01%, hence offering greater long-term stability.
For those deciding between a private property or HDB purchase, it would be helpful to bear in mind that HDB will only extend loans for public housing purchases, but in recent times private banks have been seen to be more lenient in extending mortgage loans for private property vs. HDB – particularly given the stringent MAS regulations surrounding HDB loans.
3. How Much Would You Need to Make to Afford a $350,000 HDB Flat?
At an interest rate of 2.6% (currently the HDB concessionary loan rate) and a mortgage term of 30 years, a family would have to earn a combined gross monthly salary of at least $3,500 in order to be able to be able to afford a monthly loan payment of $1,400.
However, this minimum income of $3,500 is calculated on a 40% loan quantum, and each family should adjust their calculations should they have other major financial commitments to consider (eg: auto loan, baby expenses, parent allowances, etc).
4. A Steady Income Flow for the Next 30 Years?
Along with the other good rule of thumb of making sure that you and your partner’s combined CPF contributions can fully cover your monthly mortgage payments, one key factor to bear in mind is that both employer and employee CPF contributions are reduced after age 55, with total CPF contributions falling from 36% to 30% as a percentage of total income.
As it is likely you will still be servicing your 30-year mortgage loan at the age of 55, it is good to bear in mind that retrenchments affect workers aged 40 years and older the most. To avoid the worst-case scenario of being evicted from your home (touch wood) – the oft-repeated mantra of keeping to your budget, and buying only what you can afford is sound advice to follow.
Given that buying your first home is likely the biggest financial commitment of your life, one last important tip is to make sure you take advantage of all the help available out there. For example, HDB offers an Additional CPF Housing Grant (of as much as $35,000) for those who qualify. Generous relatives can also be excellent sources of help, and there are many cases of parents who will “help” their children get started out by contributing a sizable portion of the downpayment for their new flat. As always, in the case of buying a new home, when you need all the assistance you can get – it never hurts to ask!