Ready to move in with your significant other but not sure if you’re ready financial-wise? Here are seven questions to ask yourself (that you should answer honestly!).
If you’re in your mid-20s or early 30s, take a look around you and you’ll find that everyone seems to be settling down. Whether they’re proposing to their significant other or planning for a baby, getting a house is definitely in the books.
While you might be pressured to purchase a house to call your own, stop what you’re doing and check in with your finances. Even if you and your partner are emotionally ready to settle down, your bank account might not be as ready.
So if you’re considering getting a house soon, ask yourself these seven questions (but please be brutally honest with yourself - there’s no point living in denial now, as it will have you living with regret in the years to come).
#1 Am I earning a stable income?
Having a stable income will help you out tremendously when it comes to monthly mortgage repayments, so you don’t have to rely on your savings that will surely run out in due time.
Depending on your monthly home loan repayments, you don’t need to be earning a six-digit salary a month. Aside from your salary, you can also rely on other passive streams of cash flow like rental income or dividends to fund your house.
A stable income is also important when processing your home application since HDB or the bank will require your income documents and CPF contribution history. Your income and funds available will determine how much you can borrow for your home loan.
If you’re self-employed, you may not have a fixed income as it fluctuates from month to month. However, you should always fund your own CPF account to fund your mortgage payments and foot the downpayment to ease your cash strain when you purchase a house.
#2 Do I have a reasonable budget?
Before you start house-hunting and get caught up with all the house viewings, it’s best you calculate your finances and set out a reasonable and realistic budget for your home.
With the sum of cash that you have in your hands, you may start aiming high by looking at private condos and executive condominiums (ECs), but be sure to factor in your external financial commitments like monthly insurance premiums and tuition loan repayments (if you haven’t already paid it off) before you set aside a sum for your home.
Be realistic too. As much as you’ll want to find the best deal in town, aiming to clinch a five-room HDB resale flat for S$200,000 is just not feasible. To get a rough range of how much you should expect to pay, go house-shopping on sites like PropertyGuru or 99.co to manage your expectations.
If dealing with numbers is just not your forte, you can consider engaging a financial agent to help you budget and manage your finances. Only then will you be able to have a rough ballpark figure in mind to help you narrow down the listings that you might consider.
#3 Do I have enough to pay for the downpayment?
Though you don’t have to pay the full purchase price of the house upfront, there’s still a percentage that you’ll have to foot as the downpayment.
Depending on the type of bank loan you choose, the amount for the downpayment differs. If you’re taking up an HDB loan, a 10% downpayment. The new staggered downpayment scheme allows you to pay the 10% in instalments: 5% when you sign the agreement lease and the remaining 5% when you collect your keys. You can even pay using your CPF OA funds in full.
On the other hand, if you take up a bank loan, the downpayment stands at 25% of the purchase price, and cannot be paid in instalments. Moreover, you’ll still have to pay at least 5% in cash, and the remaining amount can be paid using your CPF funds.
Though it may not seem like much, a 10% downpayment is already about a S$50,000 lump sum if you get an HDB flat worth S$500,000, which can be quite a hefty sum for those who have just stepped into the workforce.
Your CPF OA funds are important too as most people would prefer paying for their downpayment with it to lessen the pinch on your wallet.
#4 Can I comfortably pay off monthly mortgage payments?
As most people wouldn’t have enough savings to pay for their house in full, they would opt for a home loan to finance their house. This means that you would have to pay monthly mortgage payments for the entire tenure period, which usually constitutes the biggest proportion of monthly expenses.
The loan-to-value (LTV) ratio for bank loans is 75% while it is 90% for HDB loans, meaning that you can only loan up to either 75% or up to 90% of the purchase price of your flat, though it also depends on your CPF OA balance to determine the maximum amount that you can borrow.
Assuming you take up a loan that constitutes 90% of a S$500,000 flat with a tenure of 25 years, you’ll have to pay at least S$1,500 monthly, without factoring in the interest rate. Especially if you and your spouse have just started working, the monthly repayments aren’t cheap.
Even if you can still fork out money to pay off your mortgage repayments, you still have to factor in other expenses that would add to your monthly payments. A rule of thumb is to always follow the 50/30/20 rule: 50% of your salary goes to ‘needs’ like your mortgage repayments and insurance premiums, 30% goes to ‘wants’, while 20% goes into your ‘financial goals or savings’.
With all the financial commitments that you have on your plate, are you still able to pay off your monthly mortgage payments comfortably?
#5 Do I have enough savings to pay other costs?
The cost of buying a house doesn’t just stop at monthly repayments and the downpayment; there are lots of other costs that you might have forgotten that can amount to another huge figure. These include property taxes, maintenance costs, legal fees, agent fees, home insurance premiums and Cash-Over-Valuation (COV) (for HDB resale flats).
On top of that, another big figure that you’ll have to save up for is renovation costs, which can set you back by about S$20,000 to S$50,000, depending on the extent of your renovation works and how well-maintained the house you’re purchasing is.
For a complete overhaul of your home, you can expect to pay even more - think up to S$100,000 for large-scale renovations. If you do not have enough savings to pay for all these ‘hidden costs’, then you might not be ready to afford a home just yet.
#6 Do I have emergency funds?
Even if you’ve checked all the above boxes, it doesn’t mean that your bank account should be empty. You should still have sufficient emergency funds to tide you through unforeseen circumstances that might crop up along the way.
A general rule to follow would be to have at least three to six months of your monthly income stashed away untouched, to have the peace of mind that you will be ready for any potential financial emergencies.
In times of need with no emergency funds, you might have to skip your monthly payments like a mortgage to deal with your crisis, which would result in a penalty fee. The costs will start to snowball and have you spending even more than planned.
#7 Am I in debt?
If you’re in debt, it might not be the wisest to take on another loan and land yourself in bigger debt.
On top of that, there is a Total Debt Servicing Ratio (TDSR) in Singapore that limits the amount you can spend on your monthly debt repayments such as student loans, car loans and home loans to 60% of your gross monthly income. This was put in place by the government to help Singaporeans cope with their financial commitments and steer clear of bankruptcy.
This means that if you already have an outstanding loan to pay off, you might be able to borrow too much from the bank or from HDB for your home loan. You might even have to stretch out the repayment period of your home loan to keep within the TDSR limits, which would have you paying more as a result due to the accumulated interest rate over a longer period of time.
You should always try to repay off your existing debt if possible before buying a house and taking up a loan. Not only will you be able to increase the cap on your loan, but it also helps to prevent your debt from snowballing.
If your answers to the above questions are in your favour, congratulations! You are now one step closer to purchasing your dream home. Be sure to budget wisely and choose a home that is well within your means to avoid any financial hiccups in the future.
Read these next:
How Much Do You Need To Buy Your First Home In Singapore?
How To Buy A House In Singapore: A Complete Guide (2021)
How Much Can You Borrow For Your Home Loan?
HDB Loan Vs Bank Loan: Which One Should You Go For?
The Real Cost: Breaking Up Before Your BTO Flat Is Ready