Thursday, September 06, 2007
The Maths of Property Ownership
As property prices continue to inch upwards in the recent years, many home shoppers have been rushed into making purchase decisions in fear of having to pay even higher prices in the near future. Or some might be drawn to the opportunity of making lucrative profits in view of a property boom by buying properties for investment purposes.
Before you commit to a property purchase and hence a hefty loan, do take time to check your financial health and needs first. You should also familiarize yourself with the CPF regulations if you are planning to finance your home purchase with your CPF money.
There are several CPF regulations that might impact your home purchase and your ability to finance the housing loan, such as the lowering of CPF salary ceiling, CPF contribution rates and the limit on voluntary CPF contributions, cash down-payment when using bank loan, CPF withdrawal limit for housing as well as the restriction on use of CPF to purchase multiple properties. Details of CPF Housing policies can be found at http://mycpf.cpf.gov.sg/Members/HSG-Site
So your dream home comes with an attractive price tag of $500,000, is that all you have to think about where financing is concerned? Definitely not!
Every property purchase comes with additional expenses such as stamp duty, legal fees, valuation fees and other less obvious costs such as agent fees, cash payment for the excess of purchase price over valuation price, mortgage/fire insurance, maintenance charges, sinking fees, property tax, penalty for early loan repayment etc. So do make sure your finances allow for these miscellaneous expenses which can all add up.
Before you commit to a property purchase and hence a hefty loan, do take time to check your financial health and needs first. You should also familiarize yourself with the CPF regulations if you are planning to finance your home purchase with your CPF money.
There are several CPF regulations that might impact your home purchase and your ability to finance the housing loan, such as the lowering of CPF salary ceiling, CPF contribution rates and the limit on voluntary CPF contributions, cash down-payment when using bank loan, CPF withdrawal limit for housing as well as the restriction on use of CPF to purchase multiple properties. Details of CPF Housing policies can be found at http://mycpf.cpf.gov.sg/Members/HSG-Site
So your dream home comes with an attractive price tag of $500,000, is that all you have to think about where financing is concerned? Definitely not!
Every property purchase comes with additional expenses such as stamp duty, legal fees, valuation fees and other less obvious costs such as agent fees, cash payment for the excess of purchase price over valuation price, mortgage/fire insurance, maintenance charges, sinking fees, property tax, penalty for early loan repayment etc. So do make sure your finances allow for these miscellaneous expenses which can all add up.
And how much of your gross monthly salary should you comfortably set aside for your housing loan installments as well as other loans? Banks typically set the limit to be 30-40% just by looking at your current financial commitments, disposable cash and earning power. However, this ‘rule of thumb’ does not take into consideration other factors such as how much one needs to set aside for current and future needs and emergencies or how secure is one’s career.
The onus is always on you, the borrower, to assess your own financial situation and how comfortably you can service your loan. Use the home loan calculators found on CPF website or on many bank websites to ascertain how much you can afford for monthly loan installments and what is a suitable loan tenure. Do engage a reliable, independent financial adviser if you do not have the discipline or expertise to be rigorous in working out the sums.
If you are planning to get a bank loan for your property purchase, do shop around for the best deal. The things that you should be looking out for are the interest rates and whether they are fixed or variable, minimum loan amounts, minimum income requirements, loan repayment period, interest computation, penalty for early repayment and other perks such as legal fee subsidy, free valuation and fire insurance etc.
The onus is always on you, the borrower, to assess your own financial situation and how comfortably you can service your loan. Use the home loan calculators found on CPF website or on many bank websites to ascertain how much you can afford for monthly loan installments and what is a suitable loan tenure. Do engage a reliable, independent financial adviser if you do not have the discipline or expertise to be rigorous in working out the sums.
If you are planning to get a bank loan for your property purchase, do shop around for the best deal. The things that you should be looking out for are the interest rates and whether they are fixed or variable, minimum loan amounts, minimum income requirements, loan repayment period, interest computation, penalty for early repayment and other perks such as legal fee subsidy, free valuation and fire insurance etc.
As banks get more aggressive, loan packages get more attractive but somewhat confusing as banks try to differentiate themselves by dangling different ‘carrots’. It will be hard to do an ‘apple to apple’ comparison but my suggestion is to always focus on the interest rates rather than the small perks because a loan with better rates will save you a lot of money. If you are planning on early partial or complete repayment, then you will need to consider if there is a penalty charge or a cap on the repayment amount.
Interest rate comparisons are not so straight forward even for similar fixed rate mortgage loans. For example, the following illustrates a hypothetical comparison between the fixed rates offered by Bank X and Bank Y:
Make a guess which bank is offering a better deal?
Interest Rate
Year 1 Year 2 Year 3 Year 4 onwards
Bank X 2.50% 3.50% 4.50% 5%
Bank Y 3% 3.25% 4.25% 5%
*For Illustration Only
For the first three years, both banks offer a 10.5% aggregate rate. However, Bank A is actually charging lower total interest for the first three years because interest savings in the first year with Bank A are more than with Bank B in the second and third years.
As less interest is payable in the first year under Bank A’s package, a greater amount of the first year’s monthly installments will go towards reducing the outstanding principal.
So, even when Bank A’s interest rates go up 25 basis points more than Bank B’s in the next two years, it is taxing a loan balance that is lower than Bank B’s. At the end of the first three years, you pay less interest to Bank A.
As the competition for mortgage loans continue to intensify among the banks, it is less necessary for borrowers to consider the long-term rates offered by the banks. This is because borrowers can always re-finance when the rates of theirexisting mortgage loans become less competitive (having taken into consideration any penalties for early repayment or claw backs of legal/valuation subsidies).
So before your commit yourself to such a huge purchase which would probably take you the next 20-30 years to repay in full, do bear in mind to do your sums first. Otherwise, that dream home might just turn into your worst financial nightmare.
Bank Y 3% 3.25% 4.25% 5%
*For Illustration Only
For the first three years, both banks offer a 10.5% aggregate rate. However, Bank A is actually charging lower total interest for the first three years because interest savings in the first year with Bank A are more than with Bank B in the second and third years.
As less interest is payable in the first year under Bank A’s package, a greater amount of the first year’s monthly installments will go towards reducing the outstanding principal.
So, even when Bank A’s interest rates go up 25 basis points more than Bank B’s in the next two years, it is taxing a loan balance that is lower than Bank B’s. At the end of the first three years, you pay less interest to Bank A.
As the competition for mortgage loans continue to intensify among the banks, it is less necessary for borrowers to consider the long-term rates offered by the banks. This is because borrowers can always re-finance when the rates of theirexisting mortgage loans become less competitive (having taken into consideration any penalties for early repayment or claw backs of legal/valuation subsidies).
So before your commit yourself to such a huge purchase which would probably take you the next 20-30 years to repay in full, do bear in mind to do your sums first. Otherwise, that dream home might just turn into your worst financial nightmare.
