In Singapore, buying your first Build-To-Order (BTO) flat may be one of the biggest and most important financial decisions that you and your spouse make in your lives.
As with most things in life, it is only natural to want the best for ourselves. We want the biggest flat, on the highest floor, the most central location, and preferably, near an MRT station.
Spurred by reports from property websites on how a few HDB flats are being sold for more than a million dollars on the resale market, some homebuyers may adopt a flawed logic that it may be okay to overspend for their first BTO flat because they would always be able to sell it at a higher price in the future.
We should be cautious of seeing HDB flats merely as an investment, and be mindful of the risks in over-borrowing and overspending. A HDB flat is first and foremost a home.
A BTO flat is not your only financial goal
Excited to get their own homes for the first time, some young couples forget that there are other financial goals that they also need to work towards.
Purchasing a BTO flat that is within your means gives you the financial flexibility to pursue other important financial goals.
1. Your extra money can help you plan for retirement
For example, if you purchase a less expensive home that requires a $200,000 mortgage, rather than a $300,000 mortgage, you will save an extra $534 each month in mortgage repayment.
If you invest this $534 over the next 20 years at a return of 5 per cent per annum, you would have about $210,000 by the end of the 20-year period. That amount could allow you to enjoy a more comfortable and even early retirement if you or your spouse choose to do so.
2. Your extra money can help with important short-term financial goals
Younger Singaporeans in particular may find themselves with many financial goals to manage. These include an emergency fund of at least 6 to 9 months of your monthly expenses, sufficient insurance coverage and excess cashflow in preparation for their children in the future. It could even include personal aspirations such as furthering your education or starting a business in the future.
3. It's okay to take your time to get your dream home
You may have plans for kids in the future, but this does not mean you need to get a 5-room flat today, in an area within 1-km of a primary school. This is especially if your budget is tight.
Moving to a bigger HDB flat in the future, when you have a bigger family and budget, can also be a goal by itself. You don't have to squeeze all your future housing needs into your first flat.
How much can I afford?
This is a common question that people ask. How much is too much for your first BTO flat? Here are two basic rules that we advocate following.
Firstly, your monthly repayment should not exceed one quarter of your combined gross monthly salary. For example, if you and your spouse are earning a combined $5,000 each month, then you should ensure that your monthly repayment is below $1,250.
The other rule we advocate is not to spend beyond 5 years of your combined annual gross salary. A couple with a monthly income of $5,000 should avoid buying a flat that costs more than $300,000.
BTO flats might be built in standardised sizes but that does not mean prices are similar across the board. In fact, the variation in prices within a similar type of unit (e.g. 4-room flat) can sometimes be quite different across estates.
Different estate, different price
For example, during the May 2016 BTO launch, a 4-room flat at Ang Mo Kio was selling at an average of $440,000. The same 4-room flat further up north in Sembawang would cost an average of $260,000. That's a difference of about $180,000!
The point here is that there are options available for different budgets and aspirations. More importantly, know that you have a choice of whether you want to spend more for a home in a centralised location, or save up by opting for flats in non-mature estates.
Same estate, different price
Even within the same estate itself, prices can vary significantly for the same unit type. Here is a quick observation of the price range for 4-room flats from the May 2016 BTO launch.
While your choice of home is a personal preference, financial considerations should not take a backseat in your decision. The unit you select should fit within the budget that you have set.
Opt for a 4-room (or smaller) flat in a non-mature estate
Last but certainly not least, first-time buyers whose combined monthly household income is less than $8,500 will be eligible for the Special CPF Housing Grant (SHG) of up to $40,000, if they buy a 4-room or smaller flat in a non-mature estate. This would significantly help offset the cost of purchasing their first BTO flat.
Your BTO flat - a home you can comfortably afford
The best way to think about the purchase of your first BTO flat is to consider it as your home, rather than an investment asset. You should place a special emphasis to find a home you can comfortably afford, instead of squeezing yourselves dry to pay for a flat in the hopes that you can always sell it for a profit in the future.
DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.