Five Things First-time Property Buyers Must Look Out for
Financial Planning, Mortgage Financing Options, Market Research, Price and Value, Renovation Expenses
Buying a first house is a major milestone in anyone’s life, and the responsibilities that come along with it commensurate with the task. While it seems impossible to keep track of every detail, I would like to share with you five mistakes you can avoid saving yourself some money.
1. Financial Planning
It is important to have a detailed financial planning prior to going for a house hunting. You can begin with assessing financial situation by looking into your cash, and Central Provident Fund (CPF) Ordinary Account balance. Set clear budget with sufficient savings for rainy days. If you need to take up a loan to finance your purchase, you shall consult with a few mortgage bankers or mortgage brokers. If you are taking HDB loan for your purchase, you must first have HDB Loan Eligibility (HLE) Letter prior to receiving Options to Purchase from a resale flat seller, and not after. If you are taking private bank or financial institution mortgage loan, it is advisable for you to obtain an In-Principle Approval Letter from them.
You also need to be aware of the cost of purchasing and cost of owning properties in Singapore. Cost of purchasing includes items like Buyer’s Stamp Duty, Additional Buyer’s Stamp Duty, conveyancing lawyer fee, and agent fee. Cost of holding includes items such as property tax, fire insurance, monthly service & conservancy fee for HDB flats or maintenance fee and sinking fund for private properties.
2. Mortgage Financing Options
If you are purchasing an HDB flat, you can choose to finance your flat with a housing loan from HDB or a bank that is regulated by the Monetary Authority of Singapore (MAS).
As property loans can be large, long-term liabilities for most individuals and households, the government introduced Total Debt Servicing Ratio (TDSR) limit in 2013 to ensure that borrowers are not over-leveraged for property purchases and ensure financial prudence among borrowers. Current TDSR limit is 60% which means that only 60% of borrower’s income can be used to service debts such as housing loan, car loan, renovation loan, credit card, etc. For HDB flats and Executive Condominiums (ECs) bought directly from a developer, additional threshold Mortgage Servicing Ratio (MSR) of 30% applies. MSR refers to the portion of a borrower’s gross monthly income that goes towards repaying the property loan. If a borrower does not have any other loan except housing, he can then borrow more to purchase private properties than that of HDB flats or Executive Condominiums (ECs) as he can use bigger portion of his monthly income to service the installment.
While HDB concessionary rate has remained at 2.6% for decades, recent housing mortgage rate hovers between 1.3-1.5%. Loan-to-Value ratio for HDB loan is 90%, while bank’s LTV is 75% for first housing loan. LTV is a percentage amount borrowed over either the transaction price or value of the property, whichever is lower. HDB requires no cash down payment, while banks require 5% cash down payment. HDB is widely known to be more lenient in terms of late payment while banks have the right to foreclose your property if you default on 3 consecutive months of installment. If you finance your flat with HDB loan, you can refinance your housing loan to a bank in the future and it can’t be done the other way around i.e. bank loan to HDB loan.
If you need a larger loan amount and limit your cash outlay, you shall opt for HDB loan. In the future when you are more financially stable, you may refinance your HDB loan to a bank loan to enjoy savings on interest. However, if you have the 5% cash to fork out for the down payment, you should go for bank loan to reduce your interest from the very beginning.
Source: Central Provident Fund (CPF)
3. Real Estate Market Research
HDB Flats: BTO and Resale Flats
There are two types of HDB Flats, namely Built-to-Order and Resale Flat. HDB Built-to-Order (BTO) flats are brand new HDB flats that are yet to be built. HDB sell BTO flats directly without involving middle-man i.e. real estate agent. Resale flats are second-hand HDB flats that are already owned by someone else. There is an open market for resale flats. There are 8 different factors such as eligibility criteria, price, choice of location, waiting time, size, renovation cost, value for money between BTO and Resale Flats. Click here to learn more.
Private Properties: Freehold or Leasehold Properties? New Launches or Resale?
Property leases are classified as either freehold or leasehold. With some exceptions, residential leasehold titles usually run for 99 years, and industrial leases run for either 60 or 30 years. Generally, the value of properties vary with its lease tenure. The property value is higher if the remaining lease is longer. The longer the leases of properties, the slower its value will depreciate in relative to freehold properties thus generally it is safe to purchase 99-year leasehold properties and hold them for the next, say 20 years. On the other hand, the shorter the leases of properties, the faster its value will depreciate relative to freehold properties so property buyers may want to avoid older properties (>20 years). Reason being is that moving forward the depreciation would be faster so any upside potential from will be very limited, if there is any. Refer to Leasehold Table released by the Singapore Lands Authority.
Graph of leasehold values of land as a percentage of its freehold value, based on SLA’s Leasehold Table (“Bala’s Table”). Image credit: Juan Velasco, Centre of Liveable Cities
Click here to learn more about Freehold and Leasehold Properties in Singapore
New launches are mostly of 99-year leasehold. With new launches, you have to wait approximately 3-4 years to be able to start using it or receiving income from it. You also buy from the show galleries so you can’t see the exact end products, and usually the size is smaller compared to resale properties. New launches are more expensive due to increasing land and construction cost. You only consider new launches if you only want brand new houses, and so happens the project is the rare one located close to next MRT station of your choice, or close (or far) to your parent’s house. You must be willing to pay top dollar usually ~30-40% higher than resale properties, and patiently wait for 3-4 years. Otherwise, you should avoid new launches, and instead go for resale properties.
Click here to learn more about New Launches and Resale Properties in Singapore
4. Price and Value of Real Estate
Seller’s agent has the interest of his client, the seller, to protect and he will do everything to sell to you at the highest price possible. Without proper understanding value of property, you may make impulsive decisions. Feelings often overwhelms rational. While mortgage bankers may provide you with an indicative value of the property, those are desktop valuations and they often vary as they have not physically visited the assessed property. The Seller’s Agent, representing the Seller, always tries to justify their high asking price by highlighting the unique selling point of the properties such renovation, unblocked view, corner unit, no afternoon sun, etc. In this instance I would like to highlight the importance of engaging a trusted and competent Buyer’s Agent that can guide your buying process from financial planning up to the collection of your keys. The Buyer’s Agent can provide you with professional opinion on the value of the property and ensure you do not pay more than what the property is worth. The Buyer’s Agent fee for buying HDB resale flat is typically 1%. For private properties, the seller typically pays the commission for both the seller’s and buyer’s agent, so buyers don’t need to worry about the expense of hiring a Buyer’s Agent.
5. Renovation Expenses
Unless you are purchasing a brand-new home from a show gallery from real estate developer, you may end up needing to renovate. You might purchase supposedly well-renovated house only to find out there are many unseen defects and it doesn’t look that nice without all the previous owners’ moveable furniture. If you do not plan this properly from the beginning, you may need to take up a renovation loan on top of your mortgage loan.