Suppose you took a loan of $400,000 to buy a HDB flat and pay over 25 years at 2.6% interest. Your monthly installment is $1,780. If your family income (net of CPF contribution) is $4,500, the monthly installment takes away 40% of your income. You may think that it is still manageable.
Many people are paying 40% (or more) of their family income towards the mortgage payment. They use their CPF contributions and top it with their cash contribution.
What will happen if interest rate start to rise? Thirty years ago, borrowers were paying interest at 8% on their mortgage loan.
Let us just look at the impact of interest rate at 5% per annum. Your monthly would change to $2,250. This would represents 50% of your family income. The increase in interest rate will take away 10% of their net income. Can you afford this higher payment?
What happens when interest rate goes up to 7%? The monthly payment will jump to $$2,650. This will represent 60% of your income. The jump in interest rate from 2.6% to 7% will take away 20% of your income.
Will interest rate increase to 5%? Quite likely. Will it increase to 7%. Maybe. Some countries have interest rate at 10% or higher in recent years. Who says that this may not happen?
Lesson: avoid paying a high price for your property. make sure that the price does not exceed 5 years of your income. If your income is $4,500 a month, do not pay more than $270,000 for your property. Certainly, $400,000 is too much, and too dangerous!
Tan Kin Lian
Mr. Tan,
ReplyDeletemost young graduates start with about 2500 per month so 5 years ia 150k. There are no properties in Singapore that sell for 150k. I think 2 rooms hdb now also cost more.
Hi Walau
ReplyDeleteOur property prices are way to high, relative to wages.
However, nowadays most families have 2 income earners. So, the family income should be $5,000. They can buy $300,000 but not more.
Interest rates will rise for sure, eventually.
ReplyDeleteHowever, with Quantitative Easing part2 ( QE2 ) I beleive the rates will remain below 5%.
This will be for another 3 years or more.
There is no other alternative but to keep interest rates low because it allows some form of business continuity.
Despite the reality that housing loan rates will go up, it will not happen for a long while yet.
Mr Tan,
ReplyDeleteMy family income is $8k/mth. I bought a new flat 3yrs ago at 200k but yet to receive keys.
My friend's family income is $10k/mth. They just bought a EC at $850k.
I really wonder how they can pay though i am tempted to buy too!
Han
Mr Tan,
ReplyDeleteMy family income is $8k/mth. I bought a new flat 3yrs ago at 200k but yet to receive keys.
My friend's family income is $10k/mth. They just bought a EC at $850k.
I really wonder how they can pay though i am tempted to buy too!
Han