Updated 15 Jan 2019.
Planning to buy a home isn’t an overnight decision. There are many ducks to line up in a row, and some steps might take more time than others. As such, it’s always good to plan ahead – at least 12 months ahead – before committing to a home purchase. Running into the purchase of a home half-prepared is a painful lesson to learn.
But we live in a FOMO (that’s Fear Of Missing Out) era, and you might come across a property that you think is perfect for you, and you feel the need to accelerate your timeline. However, signing on the dotted line before you are prepared could be financially painful, and cause you a lot of unnecessary stress. Therefore, it pays to go in when you are primed and ready.
To help you along, here are a few steps you can take this year to ensure you have a better chance of buying a house in 2020.
1. Stable pay check
Most people will need to borrow money from the banks to finance the purchase of their homes. In order to do so, you will need to prove to the bank that you’re capable of repaying your mortgage. Therefore, a stable pay check will show that you can keep a job and as a result, have income that can be used to pay the mortgage. A stable pay check also means consistent CPF contribution which in turn will come in handy so that you do not need to tap too deeply into your cash savings to pay for your home.
2. Credit score awareness
A good credit score is the best assurance a bank can use to assuage them of your commitment toward paying the mortgage faithfully. Good credit scores mean you are prudent in paying your bills on time and in full. If you have outstanding credit card debts for instance, try to clear them and keep a clean slate for at least three months before applying for your mortgage for a higher chance of getting it approved.
3. Budget planning
The cost of living in Singapore can be high, and you’re likely to have more commitments than just a housing loan. You’ll need to ascertain a comfortable amount to pay the bank back monthly over 25 years while being able to live your life comfortably. What you certainly want to do is be cognizant of the factors that can impact your costs.
You might also wish to use our handy Affordability Calculator, to see how much you can afford at your current level of income and savings, and use the year ahead to grow your reserves and/or income!
4. Save more
With the latest revisions to the loan-to-value ratio, banks can now loan a maximum of 75% of the net purchase price or market valuation (whichever is lower). As such, you will need to part with your own cash and/or use your CPF for the remainder. So, it is best to take the time to save up as much as you can first. Being able to put down a larger downpayment would also mean a smaller monthly mortgage, and some folks might choose to borrow less from the bank to reduce their monthly burden in the future.
However, home buyers should always prepare at least between six to 12 months of cash reserves that they can use to pay off their commitments, including their home loan, in the event that circumstances change
5. Wants vs needs
We all have a wishlist when it comes to our home. Common items we’ve seen include a big unit, a walk in closet, a large living room for entertainment, and to live in a central area. However, we first need to ask if we can afford them and, do we truly need them? If you’re a single buying your first property, it does not make sense to jump headfirst into a 3 or 4-bedroom unit. Establish your wants and needs against your budget to determine what works best for you.
While property prices in Singapore generally trend upwards, the key to appreciation is holding power. We’ve all seen the TV shows where some buy a really desirable property and flip for a quick profit, but that’s honestly a rare scenario in Singapore. Appreciation in Singapore happens over the medium to long term, and policies such as the Minimum Occupation Period for HDB flats and Sellers Stamp Duty (SSD) for private properties either prevent or discourage flipping. this is a There is a surplus of property in Singapore and though they are all generally expensive, it’ll be even more costly to buy something out of your budget and not have the power to offload once the MOP is over, at a profit. Even if you manage to sell at a slight profit five years later, who’s to say that property prices for that unit type elsewhere wouldn’t have increased? Avoid playing catch-up with property prices and buy smartly.
6. Type of home
Your budget ultimately determines the type of home you can afford but you owe it to yourself to at least make peace with that fact. Determine just what you want first – be it an EC, condo or a BTO – and plan from there. First-time homebuyers should always consider BTO flats more as it gives you a relatively painless and lower-cost start into the property market.
Plus, there are penalties in place for people who own private property and then switch to a BTO flat. Avoid that pitfall and start modest. If you’re Singaporean, take advantage of the fact that a BTO flat is what is known as the “first bite of the cherry” – and provides a relatively low cost asset that you can slowly use to build your wealth over time.
7. Research time
Study the URA Master Plan for the future of the areas you are interested in. Sometimes, a property may cost lower in a developing area but in 15 years all that would change. You’ll want to take advantage of those things and the only way to know what may come is to familiarise yourself with all the plans of the different areas the government makes public.
PropertyGuru also goes in-depth on each area’s Master Plan in our AreaInsider content. Check it out to see what are the developments over the next year that could drive property values up in the coming years.
In addition, visit show flats even if you’re not buying yet to get a rough idea of the type of homes that are out in the market, the type of developers and what they’re good at and the average prices and how they move month-on-month, through the quarters.
8. Outstanding loans
While clearing your outstanding loans in the year ahead will help you to improve your credit score, it is also important to have as little debt in your name as possible to improve your Total Debt Servicing Ratio (TDSR). The Singapore government has mandated that you can only use 60% of your monthly income to service your loans, including your car, credit card, student loans and so on. Outstanding loans will therefore impact your TDSR and reduce what you can potentially pay per month, and as such, reduce how much the bank can loan you.
Buyers should also note that variable income, such as bonuses and commissions will not be taken at the full amount to calculate TDSR (the government calls this a “haircut”).
9. Get pre-approved for a mortgage
Until you know that a bank will lend to you, do not commit. This step comes in closer to when you are financially ready to start looking for a home seriously, and it is a key step. Get pre-approved , or what’s known as an “in-principle approval” for your mortgage amount, so that you can make an offer confidently when the time comes.
There are many more steps to take before you sign your Option to Purchase (OTP). These nine steps however are a streamlined version of the best practices to take prior to buying property. Take the time to consider them and research more because while the steps are the same for everyone, how you go through them is unique to you.
Do not rush into buying a home, no matter the reason. You must always be financially sound before you take that step or you’ll have a long and arduous 25 years ahead of you to make good on your loan payment.
Have a great year ahead, and feel free to drop any questions you might have at Ask Guru!