Are you a young adult, looking forward to buying your very first home?
If you are, then consider these two scenarios. Which would you pick?
Option A seems like a direct route to your dream home, doesn’t it? Find your ideal house, make the decision to purchase it, and work towards making it yours.
What if we told you that the ‘adult’ choice is Option B – where you start with your budget first?
Or, worse yet, what if we told you that Option A is actually a combination of 4 pitfalls you should avoid when making a home purchase?
If the idea of buying a home seems stressful and daunting, you’re not alone. It is, after all, one of the biggest financial purchases you will make in your lifetime. It’s even scarier if you’re in your 20s, just starting to build a career and don’t have huge financial reserves to draw from.
But fret not! We’ve put together a guide that will help you build a plan for your home purchase, while ensuring that you stay in good financial shape.
Before you figure out how to pay, calculate how much you can afford to pay
To “adult” is about making the best decision for yourself, based on your own needs. It means not falling for trends or blindly following what everyone else seems to be doing.
Applying this principle to housing, it’s important to first determine the type of housing (resale, BTO or private housing), the size, and the location that fit your unique budget and needs. These three factors in particular will impact the cost of your house, so spend some time focusing on them first.
The next thing to consider is your eligibility for the various
housing grants available. Depending on your income and the type of housing you pick, first-time homebuyers may receive up to $110,000 in HDB housing grants.
Once you have determined which, if any, housing grant you’re eligible for, you will have a realistic idea of how much money you need to set aside, based on your preferred type of housing option.
Do also check out your eligibility for the
Staggered Downpayment Scheme, as you may have the option to pay your downpayment in two instalments, instead of paying the entire sum upfront.
How you can split your downpayment into 2 instalments using the Staggered Downpayment Scheme
Now, you’re ready to move on to ‘how you can pay’!
I can use my CPF to finance my housing loans, right?
Your CPF OA savings can be used to help finance your housing loans. In fact, if you have been steadily contributing to your CPF Ordinary Account (OA) for at least 3 years on a modest income, you will likely be able to afford the
10% downpayment for a 4-room BTO.
But don’t get ahead of yourself just yet – there are certain limits as to how much of your CPF you can use.
Known as the Valuation Limit (VL) and Withdrawal Limit (WL), these help to regulate the amount of OA savings you can use to finance your housing loan.
Simply put, the VL is the purchase price or the value of the HDB flat at the time of purchase, whichever is lower.
The WL is 120% of the VL, the maximum amount of CPF you can use to finance your flat. To use your CPF beyond the VL, you will first need to set aside the Basic Retirement Sum.
You should also find out how TDSR (Total Debt Servicing Ratio) and MSR (Mortgage Servicing Ratio), will affect the amount you can borrow. TDSR applies to all properties, but if you’re intending to purchase a HDB flat or EC, you’ll need to take the MSR into account as well.
How do the Total Debt Servicing Ratio (TDSR) and Mortgage Service Ratio (MSR) affect your home loan?
Hot tip: Take a minute to consider the long-term implications of each decision. In the case of your CPF, using up the majority of your savings now may mean lesser out-of-pocket expenses, but this comes at the expense of your future retirement savings.
Consider this: For every $10,000 in your OA, you will earn $250 in interest alone each year. So, consider using part CPF, part cash, to finance your home in order to maximise the interest rates.
You should also consider whether you can pay your monthly loan instalments comfortably and when you can finish paying off your home loan.
Can I afford that 4-room BTO flat?
Downpayment, monthly payments…what else do I need to purchase my flat?
So far, we’ve walked you through the process of figuring out your housing budget and financing options.
Though we haven’t mentioned it yet, do bear in mind that buying a house tends to come with additional costs in the form of renovation, furniture, appliances, and any other items you’ll need to transform your house into a comfortable home. These tend to add up as well, so setting a separate budget in place for these items will be a smart, adult thing to do.
In addition to those, your financial commitment to your home doesn’t end there. Once you become a homeowner, you’ll be faced with several recurring costs related to upkeep, maintenance, and so on.
Spend some time calculating the average amount you’ll have to set aside each month to maintain your home purchase, and you’ll have a better idea of the full financial commitment that comes with being a homeowner.
Now that you’ve done that, it’s up to you to put those plans into action and make a well-informed decision. Even if you’re not buying a house anytime soon, congratulations: You’ve embarked on the very first step to adulting, just by reading this article!
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