Tan Kin Lian's Blog: Seven new rules for first time home buyers

Saturday, September 12, 2009

Seven new rules for first time home buyers

Here are some useful tips.

Here is a rule of thumb. If your repayment is to be kept at 30% of your income (plus 5% going towards maintenance, tax, insurance and other ownerhshop cost), and you take a 30 year loan at 4% interest, the cost of your home should be not more than 5 years of your income.

If your combined income (two working parents) is $50,000, you should buy a property for not more than $250,000. If you have the 20% cash payment, you can go up to $300,000.

Do not overstretch and buy a more expensive property (including HDB flat). Do not be misled by the low interest rate charged on your HDB loan now - as the interest rate is likely to increase in the future. It can be a burden on your finances.

13 comments:

Anonymous said...: Mr Tan

What is the average loan period most HDB buyers take ( ie 3, 4 and 5 room new and resale buyers ) ? Do you know where we can get such stats ?

Also I disagree on a 30 year quantum - it's just plain risky considering that the world is changing so fast that no one can be assured of very stable jobs in the future; September 12, 2009 1:19 PM
Tan Kin Lian said...: If you do not wish to stretch on a 30 year loan, you can go for a 20 year loan. In that case, make sure that the property price is lower, say 3.5 years of your salary. You should then be content with a smaller flat.

I encourage people to be prudent. At present, many people are going beyond 5 years of income, which is risky.; September 12, 2009 1:51 PM
Vincent Teo said...: What to do?

20 years back when a couple got married, they were contended with just a 3-room or 4-room HDB flat. Life was simple then, most of them did not achieve 5Cs but gradually worked towards achieving them later in life.

Nowadays when a couple get married, they are aiming for at least for a 5-room flat, Executive Condos, DBSS flat or Private Condos. Obtaining the 5Cs at any cost is almost a pre-requisite before marriage. Hence they will bound to face much more financial burdens.; September 12, 2009 2:01 PM
Tan Kin Lian said...: Hi 1:19 PM
Go and search the HDB website for the prices. You should be able to find them quite easily.; September 12, 2009 2:06 PM
Anonymous said...: In early 1990s, a young couple bought a Jambo Flat (1950 sqf) in Woodland. The couple invest another unit of private Condo and stay they.

After 1997 financial crisis in Thailand, property price went down in Singapore.

The couple were cash traped and divorced !

The Jambo flat take many years to wait for buyer and sold out to Angmo below market price in 2006.

A case of poor financial plan can destroy a sweet family.; September 12, 2009 2:16 PM
Anonymous said...: If no job security, even prudent plans go haywire! And one can end up homeless!; September 12, 2009 3:20 PM
Anonymous said...: HDB keeps saying public housing remains affordable. But one can't find a single reason to agree, considering the simple act that wages remain stagnant and property prices had risen so much since 10 years ago...Where is the so called "swiss standard of living" as promised by government?; September 12, 2009 4:20 PM
Anonymous said...: >> ... for a 20 year loan. In that case, make sure that the property price is lower, say 3.5 years of your salary.

So even for people who hit the income ceiling of $8K per month they should not buy a flat cost more than $336K ($8K x 12 x 3.5)!

When I bought my 1st 4-room flat it cost $38K, the income ceiling was also $8K then. That was indeed affordable. Now, the word "affordable" has got no meaning anymore!; September 12, 2009 8:04 PM
Anonymous said...: Dear Mr Tan,

Thank you for giving advise to the public and in a selfless manner. I fully agreed with you.

In fact, I had been visiting show flats since LB collapse and also talking to banks to survey the ground. My conclusion is, it's scary and if you are not careful, you will get into trouble when things go wrong. Let me explain further, my wife and me are in our 40s, consider to be middle income, all the banks encouraged us to take a loan of around $2M and up to 70 years old. I really laughed out when those bank advisers work out the numbers for me. Then some showed me a "black" face when I asked them how am I going to earn my present income when I get to 55 or 60 years old even if I like to, to support a high loan repayment every month? They have no answer for me, some say property price will continue to go up. Ha, what goes up must come down, Newton's Law. Most of these banks are very young people, in their 20s, I wonder if they really know or out to earn high commissions.
My conclusion after this one year of "shopping" is one needs to be prudent, don't expect the banks to do that.
I have not buy any property yet because I see a bubble is forming across Asia. Many people do not understand how much interest they are paying by stretching their loans to maximum years. My experience previously is for the first 5 years or so, 75% of the monthly payment goes into servicing the interest and the balance goes into paying the actual loan. So a 25 years loan or longer will mean one is paying more than 50% compared to buying with cash. And there's no certainty that one will continue to have a job in this era and property is an illquid investment especially when market crash, there will be few or no buyers when you most need to sell.
I wrote such a long message because I'm very worried for many s'poreans, looking at the recent euphoria and property prices. How many had given a thorough and serious thought about planning for their retirement? I remembered that someone once said that most s'porean are asset rich but cash poor. I had seen several distress cases happening to my friends and colleagues, when they faced negative equity. The bank either had them to top up the difference or takeover the property which they lost $300K to $500K in 1998. I don't know how many people really think it's possible that the property they bought now can drop more than 30%. I hope you will be able to educate the s'pore public, the banks will not do that.; September 12, 2009 10:28 PM
Anonymous said...: Just to share from my personal experience, as a young working adult with a very young family.

Based on the advice of good friends, my wife and I planned our finances based on one of our incomes only, in case either one of us becomes incapacitated, or decides not to work.

We started our marriage with a combined annual income of about 80K. If we based it 5 times our annual income, we could have gotten a property of $400K. Instead, we got a 4-room flat at about $200K.

As our family members increased after a few years, we sold off our 4-room flat. Then, our combined annual income was about $200k. Once again, instead of getting a $1m property, we opted for a $500K property.

With our proportionately low financial commitment, we were able to live worry free financially. In fact, as a couple, we hope to be able to pay off the mortgage soon, with a view that my wife can stay at home to be a fulltime stay home mum.

While I am sure that different families have different financial circumstances, and that our financial circumstances are a lot fortunate than many people, I believe "living within your means" is a hardly a virtue nowdays as people are encouraged to live beyond their means, be it getting a too big/fast/flashy a car, rolling credit card debts, too big a mortgage etc.

Mr Tan, just as a suggestion to your posting about financial planning, perhaps you may want to encourage your (numerous and growing) readers to live within their means. Thanks for your hard work!; September 12, 2009 11:55 PM
Anonymous said...: In a long-term say 20 to 30 years, they are two threats:
1. Ageing population?
2. Climate change - How much of land underwater? Is there a solution?; September 13, 2009 12:47 AM
Anonymous said...: Well done, 11:55pm.
Guess we think alike. Because of our prudence, my wife and me never had a day that we have financial worries. We fully paid off our 400K+ HDB at the age of 40 years old and remain debt free today. When we did that few years back, we were left with only 2K each in our CPF, but that's fine. It's better than continue to incur interest. And we have since grow it to 5 figures again as we continue to work for the last few years. We need to educate people to not spend future money excessively, because the future is uncertain. S'pore does have it's constraints down the road. These things the politicians will not tell us. So be prudent. I am most worried about our yonger generations when it comes to buying private condos. Many of them over commit, do not understand the property cycle and the magnifying power of interest rate and loan duration. When one is young, the feeling of invincible and optimisim is always at the highest but property purchase is a long term commitment.; September 14, 2009 3:27 PM
Anonymous said...: I recently heard a taxi driver told me about the CPF limit thingy. It is totally confusing. The taxi uncle said, this issue HDB won't tell you as it is not their issue but CPF's issue. Finally i passed by CPF office and decided to go found out.

The CPF customer service counter lady tried her best to explain VL, AHWL, "cannot withdrawal above (minimum sum/2)", blah blah and I left CPF just as clueless, as well as one unhappy customer service officer as she was noticeably exasperated.

I asked around hoping somebody can explain to me, but apparently even those I asked who bought resale flats are ignorant of this. So I went to CPF's web site and try to understand what exactly is this issue. Here are my findings:-

link 1 - http://mycpf.cpf.gov.sg/Members/HSG-Site/Hsg-ValnLimit2.htm
link 2 - http://mycpf.cpf.gov.sg/Members/HSG-Site/Hsg-ValnLimit1.htm
link 3 - http://mycpf.cpf.gov.sg/Members/HSG-Site/Hsg-AHWL.htm

From link 1, I understand that if you buy a resale HDB flat, you must strive to repay CPF loan asap. Most people assume that they can drag the loan to 25 years like in a first hand HDB property. CPF's rationale for introducing this limit thingy in 2003 is to discourage loaners from using CPF to pay too much interest. At least this is how i understood it.

From link 2, I understand that if i take out a loan of 400,000 from CPF to pay for a resale flat, at some point in the future, I will draw out 480,000 and I will hit my VL, at this point, I have to explain link 3.

From link 3, I understand that if i hit my VL, CPF will start to look at whether my remaining CPF monies (combination of OA+SA+medisafe i think) is above (minimum sum/2), if yes, I can still continue to repay my loan using CPF, if no, I have to pay with cash, i.e CPF will stop the loan

After knowing this, I have been asking around, especially those who bought resale flats from HDB. Apparently the appalling fact is, I realized just as what the taxi uncle told me, none of the people I asked heard of this ruling which took place after 2003. The Valuation Limit has also steadily dropped over the years to 120% (2009) from a high of 150% (2003), i.e. loaners will hit the VL sooner.

I believe a lot of resale flat buyers are clueless of this issue. From the example given by the links above, if a buyer loans 400k to buy a resale flat from cpf, the interest will rise to 132,757 in 15 years (see link 4 http://mycpf.cpf.gov.sg/Members/HSG-Site/Hsg-MrtgeLoan-Popup.htm#M1) This means in approximately 10 years from the date of buying of the resale flat, the interest would have rose to 80,000, i.e. the buyer will hit the VL. In order to continue to use CPF to pay the HDB loan, the buyer must have enough CPF monies above AHWL (minsum/2 approximately 50k), else CPF will stop the loan. This finding absolutely scares the living daylight out of me! With the ballooning HDB resale market, do buyers know this before they embark on buying their super expensive HDB resale flats that cost 1/2 a million or more? I bet many do not realize that their CPF contribution will decline as they get older, and also the minimum sum might steadily increase in the future causing them to hit their AHWL sooner.

I wonder has this ever been reported in the media before as this ruling started only in 2003. It seems a lot of people are clueless of this. Mister Tan, please consider writing a story on this topic in your blog to explain in simpler terms and give various examples as the way I explained it might be hard for many to assimilate.; September 25, 2009 1:18 PM