Planning For Your First Property Part 1
In one of our earlier articles, we highlighted the importance of early planning for interior designing and doing up a new home. Now, let us examine the four pillars – mortgage, renovation, furniture and appliances, and property tax and insurance - of financial costs that one will have to shoulder for his or her first property. The process of buying your first house is at once exciting and intimidating until broken down into bite-sized steps. In this article, we will examine the mortgage and renovation costs.
Mortgages for HDBs can be furnished by either a HDB loan or a bank loan, while the latter is only applicable for that of private properties.
Table 1: Compilation of HDB Loan Vs Bank Loan
It is apparent that each type of loan has its own merits – an individual’s personal preference and financial situation should ultimately be the key determinants of which to choose.
Let us consider a self-employed freelancer with a variable income.
John is an insurance agent who earns a $60k annual income, plans to purchase a HDB 5-Room apartment. He has 2 choices - HDB/Bank loan
Financial Situation: Variable Income
However, this money is not evenly distributed across the 12 months, i.e., he received $1,500 in March and $8,000 in April in the last fiscal year.
Personal preference: Prefers to have a large, liquid allocation of reserves
John has a substantial pool of emergency funds to defend against the inevitable barren months.
Recommendation: HDB Loan
John will benefit greatly from taking a HDB loan because his variable income may be a likely cause of late payments, and he would be less penalized with the more lenient late fees. With a HDB loan, he would not have to cough out any cash downpayment – that would deplete his emergency fund – at the outset.
It is evident that bankers evoke memories of that hard-hitting Physics teacher who had a short fuse (no pun intended) for late submissions for homework. The guys at HDB are more lenient, like that teacher who always seemed empathetic to the dog-eating-your-homework story. That being said, this article is not a 101 on how to defer your loan payments, and there will be consequences eventually with such a mindset.
Renovation costs are furnished either through cash and/or a loan from the bank. Loans from the bank typically come with a tenure of 1-5 years, and with enough scouring, one can find competitive and manageable rates, especially if he/she is an existing customer of the bank. The loan amount extended is usually determined by a factor of your monthly salary. Some banks also offer some home insurance packages along with the loan.
Do take note that these renovation loans are strictly intended for renovation purposes. Banks will require you to submit a Hardcopy of the renovation contract and signature of the contractor and yourself on every page of the contract. Finally, the cheque will be disbursed directly to the renovation firm.
Site visits may be conducted to ensure that the funds are used for renovation only.
Also, these loans are capped to 6 times your monthly income or $30,000, whichever is lower. Be advised that different banks offer different packages – the figures above have not taken into consideration extra admin fees or tax.
Alternatively, for new BTOs, buyers may opt for Optional Component Scheme (OCS) which includes the cost of optional components to the flat price. These components include sanitary fittings, internal doors, elderly-friendly fittings, floor finishes, and other fittings.
Example of Optional Component Scheme Floor finishings - Provided Internal Doors - Provided
Example of Optional Component Scheme
Sanitary fittings - Provided
Elderly friendly fittings - Opted out
For a typical 3/4/5/3Gen flat, items such as a wash basin with tap mixer, shower set and floor finishing for the rooms can be selected to be included in the build. The OCS is, however, not valid for houses build using the Prefabricated Prefinished Volumetric Construction (PPVC) method. This will provide convenience to facilitate moving into your new house but may not necessarily be cheaper than hiring an interior designer.
An experienced interior designer will be able to estimate an accurate budget required for your housing renovation. This will help you to save costs in the form of interest rates by not borrowing more than what is necessary. A trustworthy interior designer will also help to crunch the numbers and advise the cost-benefit analysis between his services and the OCS.
ADDITIONAL: Total Debt Servicing Ratio (TDSR)
The TDSR is the maximum ratio of your income that can be allocated to the combination of an individual’s loans, including student and credit card loans. It is set at 60% currently. Do factor in the maximum debt you can take on when budgeting for renovation and deciding between a HDB or bank loan.
The TDSR is fundament on 3 constraints.
1. Stress Test
The basic premise behind the stress test is that it is inevitable that market interest rates change, the interest rates on your property changes too. If this spike occurs unexpectedly, it may result in repayment amounts too high for the borrower. The stress test assumes a hypothetical interest rate increase of 3.5% for residential properties, and only then determine the TDSR.
2. Income calculation
For variable income owners, their income is subjected to a 30% decrease for the purposes of calculating the TDSR.
This means that for a self-employed person who has a monthly income of $5000, he/she will only be able to have a total combined debt of 60% x (70% of $5000) = $2100.
3. Income-Weighted Average Age (IWAA)
For joint applications for loans, the new convention is to consider the average age of both parties (assuming both are working adults) in determining possible loan tenures.
Person A: 30 years old
Person B: 60 years old
IWAA: (30+60)/2 = 45 years old
In the subsequent article, we will consider considerations for property tax and insurance, and we believe that you will have a more knowledgeable foundation with which to begin the daunting process of buying your FIRST STAY-IN PROPERTY.