Buying a home is among the biggest decisions you can make. It can either be a great, possibly lifelong investment or a mistake that will hurt your finances for years.
There are certain things you can look out for to avoid the latter outcome, of course. Our article today is about those -- to be precise, about mistakes you shouldn’t make when buying a home in Singapore.
While there are many possible mistakes you can make here, the ones below are arguably the most common. Take note of them now so you don’t end up regretting your home purchase!
1. Assuming that you need to use an HDB loan to buy your first flat.
Believe it or not, using an HDB loan to get your first flat isn’t required.
It’s permissible to use a bank loan instead if you need funding -- and in some cases, using a bank loan may even be advisable.
That’s because bank loans for housing may now have better interest rates than HDB loans. As of now, it’s 2.60% p.a. for HDB loans, for instance, whereas you can find bank loans as low as 1.80%.
The flip side of the coin is that you usually have to make a deposit on the property of 20% to 25% if you go with a bank loan. The required down payment is typically lower if you’re using an HDB loan (10%).
If you do go with bank loans, there are a few other things to keep in mind. First, you should check out the rates and see if they’re fixed or floating.
The former tend to start as fixed-rate loans but often turn into floating-rate loans after a set number of years.
Meanwhile, the latter tend to be based on the Singapore Interbank Offered Rate or SIBOR, but this varies. Some are pegged to the bank’s own rates (interest or internal board).
Pick fixed-rate loans if interest rates are getting higher. On the other hand, you should pick floating rates if interest rates are getting lower.
Check out the lock-in periods too and possible penalties, like for bank switches before the end of the lock-in period, early redemption, or partial prepayment. All of these are critical factors when trying to choose from among different bank loans for home purchases.
2. Failing to prepare for renovation expenses.
Most buyers decide to renovate property after purchasing it. There’s nothing inherently wrong with that.
Unfortunately, renovation can have a pretty hefty price tag. In fact, if you’re unprepared, it may well deplete your accounts!
There are a lot of things you can do to prepare for it, though. Among other things, you can wait to set aside a fund for it before initiating construction, to ensure you can foot the bill before diving into the renovation project.
Or you may consider renovation loans. Some renovation contractors even offer in-house loans to clients now!
However, you should shop around for the best renovation loan rates and terms possible before deciding on anything. That’s pretty much a given for any type of debt.
As an added tip, you can cut costs during the furnishing phase of your renovation too, by the way. For instance, you can look around for pre-owned or surplus quality furniture before splurging on costly items.
3. Using all or most of your savings to make your deposit.
This is not a good idea because it takes away your savings’ liquidity and may leave you unable to foot the bill for other expenses later on.
Deposits or down payments represent only one of the expenses of owning a home, keep in mind. You may have to deal with many other costs later, like maintenance fees and the like.
If something happens to interrupt your income stream, your savings may be all you’ll have to rely on. Even if you have an emergency fund, your savings are likely the fallback once your emergency fund runs out.
Unconvinced? Just think of possible repair costs if a window or wire breaks in your new home. Think too of condo maintenance fees, property taxes, and even utility bills for water and power.
You may even have to think of stamp duty fees, valuation report expenses, legal fees, or mortgage protection plans. There’s a lot to pay for as a homeowner -- so keep backup funds liquid and intact as much as possible!
4. Hitting the cap for the total debt servicing ratio.
Just as a refresher, the total debt servicing ratio indicates that your monthly debt obligations can only go up to as much as 60% of your total monthly income.
Naturally, those monthly debt obligations will include your mortgage repayments.
Let’s say you have zero debt at the moment. You decide to buy a property and take on a mortgage.
Because your debt is nil, you decide to get as high a mortgage as you can by hitting the cap for the total debt service ratio (60% of your income).
We can tell you that this isn’t a good idea. You can’t predict when you might actually need to take on other debt in the future.
For another thing, spending 60% of your income on housing can severely cripple your budgeting and financial planning. You may not have enough left over for other financial goals or expenses to live comfortably.
Generally, you should spend no more than 30% of your income on housing. If you can go even lower than that, it would be better.
5. Getting mortgage advice from your real estate agent.
This is one of the most common errors property buyers make. You see, your real estate agent should be separate from your mortgage broker.
The latter specialise in mortgage advisory and are far more likely to do their due diligence when you need help finding a good mortgage packag
Real estate agents, on the other hand, specialise in finding and brokering transactions pertaining to real estate.
They aren’t going to exhaust themselves trying to find the best mortgage packages or terms for you. That’s because it’s not their main job -- they don’t really get paid for it.
Mortgage brokers are also better-situated when it comes to providing information and guidance to first-time property owners. In any case, they’re certainly better resources for mortgage hunting and comparison than real estate agents.
Bonus Mistake to Avoid: Not Planning for the Purchase in Advance
This should really be obvious, but a lot of people seem to commit the mistake anyway.
Frankly, unless you have enough free cash lying around to buy yourself a yacht, you shouldn’t be buying a home sans preparation.
For most people, preparing for a home purchase means researching the field, setting a budget, and even coming up with a plan to cushion the rest of your assets from the cost of getting a home.
Written in collaboration with our financial advisory partners at Virtus Associates.
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