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How Much Must You Save to Buy Your First Flat in Singapore

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Finance
Nov 23, 2018

For many Singaporeans, owning the first home is like a dream. The sort of dream where you’re falling out of an airplane, or being eaten alive by piranhas. Actually, we think those are called nightmares. The reason is cost – we all want to own a house, but the price tags are so astronomically high, we feel nauseous just looking at the numbers. Don’t panic. If millions of Singaporeans can become home owners, you can too. Here’s how much you may need:

Caveat:

The numbers below are close estimations. They cannot be exact, as they will differ on a case-by-case basis. For example, resale flats may or may not be priced above their valuation, and a mortgage broker might find cheaper legal fees for the buyer. The prices here will provide a rough gauge of what to expect.

How much does a flat cost?

The price of a flat varies based on location, and of course size. As a rule of thumb however, a typical three-room flat will be around $250,000 to $300,000, whilst a four-room flat will cost around $350,000 to $400,000 (before subsidies). Five-room flats often reach $500,000 to more than $600,000.

Note that these are prices for Built-To-Order (BTO) flats. One quirk about property is that often, second-hand homes (resale flats) cost more, not less. This is because resale flats tend to be found in more mature estates, where you don’t need to take three busses just to get to the closest Sheng Siong.

Also, some older resale flats have qualities new ones don’t. Many are a little bigger than new flats, for example, and have disposal chutes in individual units (in most newer flats, you have to take your garbage to a communal dumping area).

As such, a resale flat can cost a lot more than a BTO flat. There are four-room resale flats that can reach $500,000, and some five-room resale flats can hit the $700,000 mark. Very rarely, you’ll see in the news that a resale flat has sold for $1 million or more but these are exceptional, and are often units such as Maisonettes (giant sized flats that HDB doesn’t build anymore).

How can I possibly afford that?!

$300,000+ is an insane amount of money, from the perspective of most people. That’s like buying three cars, or one appetiser from a restaurant in Boat Quay. To afford a flat, most Singaporeans have to take a home loan.

There are two options you can go for here:

The first is to apply for an HDB concessionary loan. The second is to use a bank loan. In either case, you won’t have to pay for the house all at once. You’ll just need to ensure you can afford the down payment, and the monthly mortgage.

1. Working out the down payment

For our example, we’ll use a three-room flat that costs $320,000. This is derived from taking the typical price ($350,000) and applying the $20,000 CPF Housing Grant.

Note that further housing grants exist, such as another $20,000 grant for married couples, or for living near your parents. You can see the full list of grants here. But for our discussion, we’ll only use the CPF housing grant, as it is the one all Singaporeans have access to.

Using an HDB loan, the maximum Loan-To-Value (LTV) ratio is 90 per cent. This means that HDB can give you a maximum loan of 90 per cent of the value of your flat. The remaining 10 per cent can be paid in cash, through your CPF Ordinary Account (CPF OA), or both.

So if the flat costs $320,000, you would have to pay at least $32,000 in cash, CPF monies, or a combination of the two. Note that, if your CPF can cover the entire 10 per cent down payment, it’s possible to buy a flat without having to pay anything out of your bank account.

Using a bank loan, the maximum LTV ratio is only 80 per cent. The first five per cent of your flat must be paid in cash. The remaining 15 per cent can be paid in cash, CPF monies, or a combination of the two.

So if the flat costs $320,000, you would first have to pay $16,000 in cash. Another $48,000 can be paid through CPF, and the remainder can be borrowed from the bank.

Well then, I’ll just use a personal loan to make the down-payment!

Don’t even think about it. Under MAS Notice 632, banks can’t lend you money to make the down payment on your house.

One other important thing to note about down payments:

In some cases, you won’t be able to get the full LTV. This typically happens if you have a bad credit score – HDB or the bank might only give you, say, 75 or 70 per cent LTV. If this happens, the remainder has to be paid in cash.

For example, say that for whatever reason, HDB decides to give you an LTV of just 75 per cent. This means that you can borrow $240,000 and pay another 10 per cent ($32,000) through your CPF. This still leaves an outstanding $48,000, which has to be paid in cash.

You can check your credit score from the Credit Bureau of Singapore (CBS). If your rating is BB or below, you run the risk of this happening. To improve your credit score, you should aggressively pay down your loans and close off unused credit accounts, at least one year prior to your home loan application.

If you have a record of bankruptcy on your credit report, you will usually have to wait five years after receiving your letter of discharge, before you can apply for a home loan.

2. Work out any additional costs for taxes and administration upon buying

You’ll need to pay a few other added costs, at the time of purchase. The most notable of these are the Buyers Stamp Duty (BSD), the conveyancing fees, and any Cash Over Valuation (COV).

The BSD is based on the purchase price of the flat, or the current market value – whichever is higher. As of 20 February 2018, the BSD is:

-       One per cent of the first $180,000

-       Two per cent of the next $180,000

-       Three per cent of the next $640,000

-       Four per cent of the remaining amount

As such, the BSD for our $320,000 flat is $4,600. This can be paid with cash or your CPF.

The conveyancing fee is paid to the law firm, to handle the legal paperwork. For HDB loans, check their website for the appropriate legal fee. For a BTO flat from HDB, our four-room had legal fees of around $205. For a resale flat, it was much higher – around $725.

This can be paid with your CPF. For bank loans, this is usually between $2,500 and $3,000. Whether you can use your CPF depends on the law firm (ask their staff).

For resale flats, there’s a chance you may be paying more than the actual flat is worth. This is because you and the seller need to agree on the price, before HDB comes up with the official valuation.

For example, you may have agreed to pay $400,000 for a resale flat, but HDB’s official valuation places it at just $390,000. The extra $10,000 is called the Cash Over Valuation (COV), and it has to be paid for in cash.

3. Working out the monthly cost

The interest rate on the HDB loan is always 0.1 per cent above the prevailing CPF rate, which is currently 2.5 per cent. As such, the HDB loan rate is 2.6 per cent.

Because the HDB loan rate seldom changes, plenty of Singaporeans like to think of it as a fixed rate. That’s not technically true, as the underlying CPF rate is revised every quarter, but it’s been 2.6 per cent for decades now.

The interest rate on a bank loan is…complicated. This is a topic that can cover several extremely boring volumes, and we’d be impressed if you’re not asleep by page two. Safe to say that bank loans fluctuate. Most will average 1.8 per cent per annum, but this is likely to rise in the next few years.

Note that bank loans are cheaper for the first three years, and then jump substantially afterward. For example, a bank loan may be 1.67 per cent for the first three years, but jump to 1.95 per cent on the fourth year and beyond.

With banks, there are no perpetual fixed rates for home loans. At best, you can get a fixed rate for a certain time period, such as three to five years. After that, it goes back to a floating rate.

For our example $320,000 flat, we’ll assume the maximum loan amount of $288,000 from HDB, and $256,000 from the bank. We’ll also assume a loan tenure of 25 years, which is typical for most Singaporeans (a loan tenure of 30 years, or which ends after your retirement age of 65, will decrease the LTV. It can reduce the LTV to as low as 60 per cent, so it’s a rare choice).

At the HDB rate of 2.6 per cent, with a loan of $288,000, the monthly repayment is $1,307 per month over 25 years.

At a bank loan rate of 1.8 per cent, with a loan of $256,000, the monthly repayment is $1,060 per month (at least for the first three of 25 years).

One other thing to consider: the TDSR

There is a loan curb called the Total Debt Servicing Ratio (TDSR) framework. The monthly repayment of your home loan plus your other outstanding loans can’t exceed 60 per cent of your monthly income.

For example, say you have a monthly income of $4,500. With the TDSR cap, this means your total monthly repayments cannot exceed $2,700 per month.

So, if you already have a car loan and personal loans totalling $1,100 per month in repayments, then your home loan repayment cannot exceed $1,600 per month. If the TDSR is exceeded, you’d need to borrow less, and thus make a higher down payment (or maybe just buy a cheaper house).

This is another reason to start quickly paying down your debts, before you apply for a home loan.

The monthly repayments can be made via your CPF OA, or in cash.

Other monthly costs include property tax, insurance, and conservancy charges.

Your property tax is based on the Annual Value (AV) of your flat. This is how much it could theoretically be rented out for. The AV is determined by IRAS (check their website for their valuation of your flat).

To determine your property value, just key in your AV in the IRAS property tax calculator, along with the relevant date. Assuming our three-room flat has an AV of $26,400 (about $2,200 per month if fully rented out), the property tax comes to $736 per annum, or about $61.30 per month.

Conservancy charges vary from one district to the next. But for a four-room flat, it’s normally in the range of $60 to $70 per month. We’ll assume it’s $65 for our example flat.

After that, you’ll want to insure your property with home contents insurance. This provides pay-outs if your house catches fire, if someone breaks in to steal things, or if your burning house damages your neighbour’s (you could be liable for damages). This usually costs just $320 a year, or roughly $27 a month with AXA SmartHome insurance.

As such, the total monthly costs – inclusive of home loan repayments – is $1,460.30 per month with an HDB loan. It’s a little lower at around $1,213.30 per month.

To be safe, you should set aside enough to cover your home costs for at least six months. So for our example flat, you should try to save up roughly $8,775 in an emergency fund ($7,280 for a bank loan). This ensures your home loans are covered, in the event of situations like retrenchment. You don’t need to set it aside all at once, just build it up over time.

(In a worst-case scenario, six months buys you enough time to sell your flat at a decent price and move into a smaller one).

4. Finally, work out the cost of renovations and furnishing

Many contractors or interior designers will quote you around $30,000 to renovate an HDB flat. No, this isn’t a figure drawn from their deep experience and analytical eye. It’s simply because renovation loans from banks are capped at $30,000, or six months of your income (whichever is higher).

If you want to take out a loan for renovations, the interest rate is usually in the range of five per cent per annum – check between banks for the lowest rate.

We won’t get too fancy for our example flat, and stick to basic renovations like vinyl flooring and painted walls. Even with furnishings, it’s quite possible to “do up” a four-room flat for just under $25,000. This is preferable to using renovation loans, as the last thing you need after a taking a 25-year loan is another loan.

All in, here’s how much you’ll probably need for a four-room flat:

With an HDB loan, you’ll need roughly $36,805 in CPF or cash, and $25,000 in cash for renovations and furnishing. You’ll have to pay around $1,460 per month. Note that this can be higher for a resale flat, depending on the COV and the higher legal fees.

With a bank loan, you’ll need roughly $52,600 in CPF, and $16,000 in cash. The $2,500 to $3,000 in legal fees might come from either cash or CPF. You’ll also need about $25,000 for renovations and furnishing. You’ll then have to pay around $1,200 per month (at least for the first three years).

How are you going to pay for all this?

If you’re young and planning ahead, one way to afford the property down-payment is to use an endowment plan. An insurance endowment plan – such as AXA Savy Saver - can grow your money by around three per cent per annum, for a given period (e.g.15 years).

For example, if you were to set aside just $300 a month, compounding at three per cent per annum for 15 years, you could accumulate over $$68,800. This allows you to more than cover the down-payment, while still leaving your CPF intact.

Older buyers can look at unit trusts, or other investment options, that will outpace their home loan interest rate. For example, you could invest in a unit trust that delivers returns of five per cent per annum, while paying off an HDB loan that’s only compounding at 2.6 per cent per annum; you’ll still come out ahead in the end.

Speak to a qualified AXA financial adviser on which products are best suited to you.

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