Few things scream “I’m an adult!” more than the desire to own your own home. For many people, the idea of home-owning is appealing for its physical assurance – it will always satisfy our innate, basic need for shelter.
A house is likely to be the biggest purchase of your life – as nice it is to daydream about your make-believe dinner parties while attending open houses (don’t like – we’ve all done it), you have to always remember to put on your ‘reality’ lens on a regular basis. Buying property that one can’t afford is remarkably common. And sad.
Whether you are making the purchasing decision by yourself, or as part of a duo (or trio, if that’s your thing), here are 5 steps for you to start the journey.
Step 1: Is it the right time? Avoiding the property bubble
As a savvy purchaser, you should always have a general idea of how much something should cost. This allows you to know which purchases are not worth it (way beyond market price) and which purchases are worth it (value for money).
Here’s an oversimplified example: you know that a plate of chicken rice costs between $3-6 at a food court. All things being equal (amount of chicken, taste, location), if you find one selling for $2, you know it’s a bargain. If you find one selling for $15, you know it’s overpriced. The same goes for the property – you should know the price range.
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We admit that this is easier said than done – property bubbles are a thing. You might find that all the properties are selling for $15 (using the same chicken rice analogy). Try to avoid, at all cost, properties that command hyper-inflated prices – wait until the property market crashes (or adjusts) for a better value on your home purchase.
Nothing will make you hate your new home more than the knowledge that your neighbours are paying significantly less on the mortgage than you. 20 to 35 years is a long time to be resentful.
How do you know how to avoid a property bubble? You can start by being familiar with the property cycles in Singapore.
Step 2: Being realistic on what you can afford, taking into account your current debt situation
If you have any form of debt, whether it’s student loans, credit cards, car loans, or other personal loans, taking a mortgage can break your finances. In fact, the Monetary Authority of Singapore (MAS) placed a policy to limit how much you can borrow for a mortgage loan to discourage Singaporeans from borrowing more than they can afford to pay back.
However, this article suggests that your total debt payment (including mortgage) should not exceed 40% of your gross monthly income, instead of 60% from the above policy. This should give you ample room to pay for other living costs without struggling financially.
Quick, calculate your current debt-to-income percentage: [combine all monthly debt payments] / [gross monthly income] x 100%
What is your percentage? The lower the percentage, the better.
For example, if you calculated 5%, you can afford a mortgage up to 35% of your gross monthly income. In dollars, this means you can afford up to $1,750 in monthly mortgage on your $5,000 salary. In this case, if you plan to take a 30-year loan, you can afford property up to $630,000 ($1,750 x 360 months; after down payment).
If you calculated 30%, you can only afford a mortgage that is up to 10% of your gross monthly income. In dollars, this means you can only afford up to $500 in monthly mortgage on the same $5,000 salary. In this case, if you plan to take a 30-year loan, you can afford property up to only $180,000 ($500 x 360 months; after down payment).
Step 3: Deciding on the type of house you want on your budget
After Step 2, it is time to find the home within your budget range!
Assuming you want a private property (don’t we all), there are 6 types of housing to choose from – condominiums, apartments, bungalows, semi-detached house, terrace houses, and shophouses. Each of these options has their own pros and cons. Being open to all types of houses will give you more flexibility, but zoning in on one or two types will allow you to conduct better research on expected (and unexpected) costs related to that type of property.
For example, landed property owners will never have to worry about condominium maintenance fees, and apartment owners will never have to worry about lawn care costs associated with landed properties. The easiest way to do this is to talk to current homeowners.
Location plays a big role in deciding your house. We suggest window-shopping from property websites to save time during your decision-making process. Here are 5 property website in Singapore to buy, rent, or sell houses.
Step 4: Do you have enough for down payment and buyer stamp duty (that won’t wipe out your CPF)?
Many people put down 20-25% off the property price as down payment. You CAN supplement this amount from your CPF (for your first property), but we highly discourage you to sabotage your retirement plan if you don’t have to.
Ideally, you should be able to finance your down payment and buyer stamp duty from your own pocket with extra wiggle room. Try not to touch your emergency funds, either. Depending on your financial status, this may or may not be an easy task. Ultimately, you can make informed decisions based on your unique financial situation.
Step 5: Keeping yourself in check – getting the house you need is better than getting the house you want
As mentioned in the first few paragraphs, it is easy to let your imagination run wild over a fantasy ‘dream’ home. We want it all, don’t we? We like the idea of a large, spacious kitchen. And a swimming pool. Next to the mall. Walking distance to the MRT. Yet far enough from the crowd for privacy.
Figuring out what you actually need from a house instead of what you want might be the biggest tip from this article.
Do you want the house to start your family? If so, you might favour a house with child-friendly amenities.
Do you want the house for investment purposes? If so, you might take the rental prices in the area into consideration.
Remember – ‘dream’ homes usually come with a hefty price tag. If you can afford it, great. If you can’t, you should prioritise what is important to you.
Starting the home-buying process can be daunting, but if you’re ready, go for it. Take your time to go through all the steps, and don’t be pressured into signing anything before you are ready.
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