In a previous article, we’ve covered how homes aren’t too affordable. This caused some readers to be a bit worried, and I apologize for sending the wrong message. You shouldn’t be a bit worried. You should be having an all-out code red panic, unless the thought of being financially molested by a landlord for the next 10 years appeals to you. Each property spike will be worse than the last, so you better plan now:
…and the colour coding indicates the price. See? Who says YouTube isn’t a reliable news source?
Why Home Ownership is Important
Singapore’s inflation rate is one of the highest in Asia. A lot of our domestic policies (like the COE) raise costs, but don’t raise productivity; that’s why your pay can’t seem to match the price hikes.
There are ways to hedge against this inflation (gold, equities, etc.) but the best hedge is property. Because Singapore is land scarce, property almost always appreciates. And in some cases, the monthly cost of buying a flat is cheaper than renting anyway.
In the case of private property, a house can also provide collateral for low-interest loans (cash-out refinancing).
Question is, how do you raise enough for that first set of walls?
1. Start Saving Early
First time buyer, as seen from property agent’s POV
The earlier you can start saving for a home, the better. I’m not going to give you a number here; some people start their careers at 18, some at 30, and Club DJs apparently at 55. But the sooner you can set aside $500+ a month, the better.
Saving up $20,000 – $30,000 will open up a whole range of options: It might mean you can get a bank loan instead of a HDB loan, or get a resale flat instead of balloting for a new one.
Make a habit of saving money, and don’t rely too much on your CPF.
2. Pay Off Existing Debts
Here’s the problem: The unshaded parts are where you DON’T owe money.
When there’s a problem getting home loans, the most common reason is income. The second is debt.
The bank’s decision is based on your DSR (Debt Servicing Ratio), which measures your income to overheads. High income alone isn’t enough. If you already have car loans, personal loans, and 10 maxed out credit cards, then you’d stand a better chance just trying to rob the damn bank.
Even if you do get approval, the loan quantum (the total amount you can borrow) will be a lot smaller.
And you shouldn’t be living with a DSR above 40% anyway. Even if the bank is forgiving (most tolerate a DSR of 50%), it’s a bad idea to owe that much. Home loan rates are volatile, and the monthly repayments might go up. With a DSR of 50%, you might be unable to handle it.
3. House First, Car Second
My car loan IS my home loan. I just wind down the windows at night.
With few exceptions (e.g. full-time salesmen), your house takes priority over your car.
Cars are depreciating assets. Much like our school syllabus, they’re worth less every day. So after paying off your car loan, what you’re left with is…uh, a paid-up car loan. Those monthly payments aren’t being saved or invested, they’re just chucked into a big black hole you mistook for convenience.
Cars also bring peripheral costs. Maintenance, petrol, accessories, and car insurance all add up. So in addition to affecting your loan quantum (see point 2), the car also eats into your savings.
Also, it’s better to apply for a home loan first, and a car loan second. This way, the car loan won’t affect your DSR. So if you want a house, skip the car and save up first.
4. Combine Savings and Investment
Graphs, glasses, and an eight-ball. Grats, you’re now a qualified fund manager.
Saving money to buy a house can work…eventually. But most of us prefer owning a house before we develop an appreciation for 90.5 FM and dentures, so let’s speed it up.
Invest a portion of your money (About 20% if possible) in a growth scheme of choice. Ideally, said investment should provide a consistent growth of 3% – 5% per year. Most insurance schemes provide 3% growth, whilst index funds and some structured deposits grow at 4% – 5%.
I’d love to give you advice on which ones to buy exactly, but (1) I’m not a broker, and (2) financial products change so fast, anything I write will be obsolete yesterday. You’ll have to do your shopping the hard way. Or you could try joining organizations like FISCA (Financial Services Consumers Association of Singapore); they’ll keep you up to date on investments.
As for savings, you might want to put them in a fixed deposit if you qualify. This will raise your savings interest rate to around 0.8%.
For details on interesting investments, follow us on Facebook. We’ll update you as we spot them.
5. Accumulate Small Furnishings Early
I make them from the bones of contractors who fail me. Now, about that over-budget issue…
If you’re planning to buy in the next three to five years, keep an eye out for small pieces of furniture or furnishings.
I’m not suggesting you turn hoarder and race the karang guni man; but if your desk / chair / light fixture etc. need replacement, there’s no harm picking one that would fit your future home.
Most renovation loans are capped at $30,000, but you don’t want the biggest possible loan. Do remember, you would have taken a home loan that costs you a few thousand a month. Over three to five years, you can accumulate a lot of small items (especially fabrics like curtains) that will minimize renovation costs.
The Interior Designer might throw a tantrum but don’t give in. Every piece of custom furniture is an added cost.
When You Finally Buy…
There can be over 50 home loan packages available at any one time, so shop around to find the best rates. Or you can hit up loan comparison sites like SmartLoans.sg.
Are you saving up for your first house? Comment and tell us how you’re doing!
Get more Personal Finance tips and tricks on www.MoneySmart.sg
More From MoneySmart