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21 July 2021
SOURCE: Hpility SG
Are you planning to start a family with your partner? As first-time homebuyers, my partner and I found that buying a home was one of the most major decisions we’ve taken in our lives.
We decided on getting a resale flat instead of a Build-To-Order (BTO) due to 3 reasons. Firstly, the waiting time. For a resale flat, we will be able to receive the key to the flat in approximately 2 months from the date HDB accepts the resale application. As for a BTO flat, we would have to wait until the flats are completed.
Another reason would be the housing size – we could choose a resale flat that offers more space than a BTO flat.
Lastly, for a resale flat, we are able to choose the location we preferred whereas for a new flat, the location of the flat will depend on the locations on offer during the launch.
It's a tedious process with many decisions to be made, such as finding a reliable property agent, researching for the ideal home, negotiating the resale flat price, and getting approval for a housing loan. Deciding whether to opt for a housing loan from HDB or a bank loan was tough as there are different considerations. We did not have enough savings for the initial payment.
For couples intending to buy a resale HDB flat within the coming year, you would likely be doing the research for your ideal home. In today’s article, I will be sharing 4 important steps to consider when buying a resale flat for the first time.
Step 1: Check your savings and decide how much you can afford
I believe many of us will start off by looking for flats instead of checking our financial status first. As such, we might end up realising that we do not have enough money to purchase our dream home, or worse, over-committing to a huge mortgage that we would later struggle with.
Therefore, the very first step is for all couples to work out a budget, which includes their cash and CPF savings, eligible CPF housing grant and housing loan before searching for the ideal home. Basically, our finances play a big role since buying a house involves an initial payment, coupled with the additional expenses for décor & furniture, renovation and not forgetting the monthly mortgage instalments. Hence, it is important to know how much savings you have before making this big purchase. Based on my experience, the initial payment for a resale HDB flat is up to 25% of the purchase price (depending on the type of loan you take), the minimum amount of cash for renovating the whole house is around $50k, and décor & furniture about $10k~$15k.
I understand that many couples will find it troublesome to calculate these expenses. Not to worry, there are a few calculators at the Central Provident Fund Board’s (CPF) official website, which you can use to calculate your mortgage loan and how much CPF you can use.
Mortgage Calculator – To help you compute the monthly instalment on your housing loan
CPF Housing Usage Calculator - To help you calculate how much CPF you can use for your property. However, this calculator will not be applicable to couples who decide to buy an HDB Studio Apartment/short-lease 2-room Flexi Flat.
The ultimate goal is for couples to buy a house within their comfortable budget range. We do not want to stress over a house that we cannot afford or struggle to pay for. You can only use up to 30% of your gross monthly income to pay for your monthly mortgage instalments. An additional tip: to be more prudent, keep it within 25% of your gross monthly income to use less cash or CPF savings.
Step 2: Find a housing loan that most suit your needs
Having done your research on your finances and ideal property, the next step is to choose a housing loan. This is one of the most critical decisions, because it could be a substantial financial commitment for buyers for up to the next 30 years. First-time homebuyers who intend to purchase a resale HDB flat may apply for a housing loan from HDB or from financial institutions.
Many people have asked me, “So, which is the best housing loan?” Well, my answer to this question would be: “The decision will be based on your financial ability”. There is no right or wrong to choosing a housing loan from HDB or from financial institutions because both have their considerations.
In the current climate, you’ll find that loans from financial institutions have a lower interest rate compared to an HDB loan. While interest rates are subject to fluctuations, you may refinance to another suitable loan package if the interest rate of your existing loan turns unfavourable, subject to the terms and conditions of the loan package.
For those who have decided to take the HDB loan, you can choose to keep up to $20,000 in your CPF Ordinary Account (OA) instead of wiping out your OA savings! Those taking a housing loan from financial institutions can choose not to fully utilise their CPF savings for the flat purchase. This allows your OA savings to continue growing (earning a base interest of 2.5% p.a.). These savings can go towards your retirement fund eventually, or on a more realistic note, it can be your fallback plan if you ever find yourself between jobs and not having enough to pay for your monthly mortgage.
At the end of the day, my partner and I preferred to take up an HDB loan because it has a more stable interest rate (currently at 2.6%, pegged at 0.1% above CPF’s interest rates). Another advantage of an HDB loan is that it allows us to pay our downpayment fully using CPF whereas for a bank loan, we are required to pay a downpayment of at least 5% in cash (which we do not have on hand).
One important thing that many homebuyers tend to overlook is how the interests they end up paying over the years can add to the total cost of their house. Hence, you may want to consider taking a smaller housing loan amount or shorten the repayment period to reduce the amount of interest payable.
I would recommend homebuyers to use the CPF Total Interest Calculator to calculate their total interest payable on a housing loan.
Example of my total interest payable on a housing loan using the CPF total interest calculator:
As you can see from the screenshots above, a loan amount of $380,000 paid over 10 or 20 years makes a huge difference! By stretching the amount over 20 years, the amount of interest I would be paying is double!
Step 3: Get the housing loan approved
Next, it is important to get your housing loan approved to work out your flat budget before you commit to a flat purchase.
It is essential to find out how much loan you can take up from HDB or the banks, as well as their respective terms and conditions (interest rate, loan period, etc.) before deciding on taking the loan. As this is a long-term commitment, it is recommended to make an informed decision.
Generally, the amount of housing loan that you can qualify would depend on your income, age, financial commitments, amongst other consideration. If you wish to confirm your eligibility for one, you can submit an HDB Loan Eligibility (HLE) letter or approach the FIs for an In-principle Approval (IPA).
Step 4: Find a trusted real estate agent for advice
Those with busy schedules can engage a real estate agent for a smoother process. Real estate agents are better-informed about the current market, and therefore can advise their clients to make better choices based on their needs.
It is important to ask around for referrals and get a trusted agent who is honest and has your best interests at heart, as well as having the experience to negotiate the best deal on your behalf. They will also help to handle the paperwork, which is time-consuming and tedious for the buyers.
Alternatively, buyers may also handle the flat purchase themselves using this guide from HDB.
Based on my experience, buying a resale HDB flat in Singapore will take you at least 6 to 12 months, from doing research, planning your finances, down to making the decision and finally buying the dream home that you want. Hence, it is important for flat buyers to plan early and consider their finances before they commit to a flat purchase.
For couples who intend to take a housing loan, do consider setting aside $20,000 in your CPF OA savings for your future retirement or repayment needs. This will also allow you to continue to earn the base interest of 2.5% p.a. With careful consideration and prudent decision-making, your home ownership journey can be truly fulfilling! Stay safe, healthy and happy!
This article was first published on Hpility SG.
Information in this article is accurate as at the date of publication.