Before you buy your first home, evaluate your financial capacity, know the cost of each housing option, and understand the government’s latest rules and measures. Otherwise you might be jumping into a situation that’s more than you can handle.
And ignore the advice of friends, family, and especially property agents who constantly push you to buy your first home. The last thing you need is to get pressed into a financial commitment that you’re not ready for. After all, you’re the one who’s going to be paying the mortgage, not them.
Do you think you’re ready to buy a home? If you are, here are five signs that you’re prepared to handle the financial responsibility:
Have an Emergency Fund
Do you have insurance or investments? Great! But that’s not going to help if you need immediately accessible cash.
What if the floating interest rate on your home loan goes up, adding hundreds of dollars to your monthly repayments? What if your company downsizes or a family member needs an expensive operation?
Having an emergency fund means putting aside 3 – 6 months worth of income for such emergencies. It’s also a sign that you’re ready to buy your first home.
Have Approval in Principle
Buying your first home without Approval in Principle (AIP) is like playing Russian roulette with your money, especially when it comes to your booking fee. That’s because if you can’t find a bank to loan you money to buy the home within 14 – 30 days, your booking fee is forfeit.
That means you could stand to lose thousands of dollars! Here are examples of how much you can lose from forfeiting your booking fee:
• For ECs and DBSS flats, the fee is 5% – 10% of the purchase price.
(Example: The 5% booking fee for a $500,000 DBSS flat will be $25,000)
• For resale HBDs and landed properties, the fee is 1% of the purchase price.
(Example: The 1% booking fee for a $500,000 resale HDB flat will be $5,000)
That’s why it’s smart to speak to a bank and get an AIP before you book a flat. It’s a free document you can get at any bank that states how much the bank promises to lend you.
Don’t Use Credit for Your Down Payment
The down payment on your first home can range from 10% for an HDB loan, to 20% for a bank loan. If you don’t have the cash (or CPF) on hand to make the down payment, either wait till you do or find a more affordable home.
Taking out a personal loan to pay your down payment is a bad idea for several reasons:
• Your monthly payments will be higher because you have to pay for two sources of interest.
• The higher interest rate will eat into your capital gains, affecting your resale value.
• The higher interest rate means your debt will grow faster than the value of your home.
If you can’t afford a bigger flat or condo, just save up until you can instead of using a personal loan to cover your down payment.
In most cases, a personal loan will not give you the amount required for a big ticket property purchase, as the bank give you up to 4x your monthly salary at best.
Don’t Buy a Home That’ll Wipe Out Your CPF
It’s very tempting to use your CPF whenever you get the opportunity – especially on your first home. But before you think about dumping all of your CPF into your home purchase, think about your retirement. Can you afford to put all of your eggs into one basket?
So before you cash in your chips to buy a home, think about the following:
• Will you eventually sell your home and downgrade to a smaller one?
• Are you parking your money in any investments with higher returns than CPF?
If your answer is no, you should rethink using ALL of your CPF towards your first home. Remember, you still have retirement to think about!
Know What’s Going on in the Property Market
Ignore anyone who says anytime is a good time to buy property. There is a wrong time to buy – and it’s at the peak of the property bubble. Why?
If you buy your first home at the peak of a property bubble, you’re buying high at a point where prices can only go one way – down. Instead, wait for the market to bottom out because that’s when property agents and developers will lower their prices to find buyers.
How can you tell if the housing bubble is about to pop?
Keep your eyes and ears open for the following:
• You hear news about falling prices and a lower volume of home sales.
• The government imposes or considers “cooling” measures.
• Banks start offering “creative” loan packages with loan tenor or interest rate adjustments.