Like marriage, buying a flat is a major commitment that lasts a lifetime.
For many Singaporeans, the first priority after marriage is a house. But like marriage itself, a house is a major commitment – a mortgage effectively lasts a lifetime (25 to 30 years).
While you may be eager to get the keys after getting married in Singapore, there are plenty of good reasons not to rush:
Reason #1: BTO Flats Can Be More Affordable
For those of you looking at HDB flats, you will be choosing between resale flat (being sold by a previous owner), and a Built to Order (BTO) flat (brand new and not yet constructed).
A BTO flat can take two years to complete, but there is a big advantage. When you purchase a BTO flat, you don’t have to contend with Cash Over Valuation (COV). You will not know the COV amount until after you have gotten the Option to Purchase, and agreed on the overall price.
When you purchase a resale flat, the seller typically expects a profit. You may find out, after agreeing upon the price, that you are paying much more than the unit is officially worth.
COV prices are especially high if you want to buy a flat in an old, developed estate, such as Queenstown or Tiong Bahru. The seller charges more because the amenities are already built up. This is why a three-room BTO flat in Punggol might come to just S$350,000 (before subsidies), but a similar resale unit in Queenstown might be in excess of S$450,000.
While buying resale cuts down the wait time (and can mean a more convenient location), consider the impact on your finances. A difference of S$100,000 more can mean paying several hundred dollars more on the mortgage, every month for the next 25 to 30 years. Patience might be better rewarded.
For those of you looking to buy private properties, consider under-development condos (those still being built), which often come with early bird discounts. These can go for as much as 15 to 20 per cent cheaper than completed units.
However, you need to ensure you are buying from a reputable developer: you will not be able to see or test the unit for defects until it is already built.
As there are tremendous savings to be gained from patience, think hard about whether it’s worth rushing. After all, the savings you get from waiting another year could be instrumental in starting a savings fund for your first child, or in repaying outstanding loans.
Reason #2: You Can Save For the Down Payment and Pay It In Cash
No bank can loan you the full value of your house. A bank loan can only finance up to 80 per cent of the house. For a S$600,000 flat, you can only borrow up to S$480,000.
Of the remaining amount, 15 per cent can come from your CPF Ordinary Account (CPF OA), and at least five per cent must be in cash.
For HDB loans, you can borrow up to 90 per cent of the flat price. The remaining 10 per cent can come from your CPF OA. While this means you may not need to pay anything in cash, you will still want to minimise the drain on your retirement funds.
If you cannot afford the down payment, you may end up taking a personal loan for it. This leads to high debt commitment, as you now have two loans to repay.
Taking a personal loan also affects your Total Debt Servicing Ratio (TDSR), which caps your loan repayments to 60 per cent of your monthly income. Borrowing for the down payment will eat into your TDSR score, and may disqualify you from a home loan.
It might be a good idea to save up for a year or so, and accumulate enough to make the down payment without getting another loan.
Reason #3: You Have Time to Build a Mortgage Fund
A mortgage fund is an accessible form of savings (such as in Singapore Savings Bonds), that ideally provides sufficient mortgage repayments for three months.
Of course, most people will not be able to build this fund overnight – it represents a substantial sum of money. But such a fund can be built up over time. It might be a good idea to start building the fund now, and accumulate the two to three months of mortgage repayments before buying your house.
This ensures that, in the event of an emergency, you will not be forced to sell the house in a rush. If you are retrenched, it gives you time to find a job while covering the mortgage. If you absolutely cannot afford the house anymore, you will have sufficient time to find a buyer and sell it.
Reason #4: You Need Time to Build a Credit Score Or Repair a Bad One
If you have never used credit cards or loans before, you will have a default credit score of Cx. This means you are an unknown risk, as the bank has no clue whether you can pay your loans or not. If you have abused credit cards or loans, you will have a negative credit score.
Both of these affect your loan quantum, or the total amount you can borrow. For example, if you have no credit or bad credit, a bank may be willing to lend you only 70 per cent of the house value, rather than the full 80 per cent. Remember that, due to the high prices involved, a difference of 10 per cent means several hundred thousand dollars.
This can mean the difference between getting a house you want, and a house that you merely settle for. If you are going to be spending most of your life there however, you’ll want the absolute best you can get!
As such, it may be worth taking a year to responsibly use small loans. By borrowing small amounts and responsibly paying it back, you can gradually raise your credit score. You can find access to the cheapest credit facilities on SingSaver.com.sg.
Reason #5: Your Personal Savings Are Still Depleted From the Wedding
Paying for the wedding dinner, engagement ring, honeymoon, etc. is often enough to wipe out your savings. It is dangerous to buy a house when you have absolutely no money in a savings fund.
Once you make the sizeable down payment, you will be saddled with monthly repayments almost immediately. If you are injured or unable to work, you will find yourself needing to take out loans to cover your needs. This often involves the use of rollover credit card debt or personal instalment loans.
For these reasons, it’s a good idea to build up your savings for a year, before taking the plunge. Keep 20 per cent of your income in a separate bank account. If you are on a tight budget, you can use these savings as your mortgage fund, but try and save for both if possible.
We know this scrimping will mean a few sacrifices, but you will be thankful for the emergency cash when the first emergency strikes.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.