Why your home is much more expensive than you think

In Singapore, most people are encouraged to own their own homes, be it a HDB flat or a private property. According to Singstat, home ownership rate among Singapore households is currently about 91 per cent, which ranked us among the top 3 countries in the world.

Generally speaking, home ownership is a good thing from a personal finance standpoint. Having your own home means you avoid having to pay rent to someone else for your accommodations, and do not have to worry about escalating rental cost. Even if you have to service a monthly mortgage, it is more comforting to know that the repayments go towards helping you build equity in your own home.

It is no secret among Singaporeans that buying a property in Singapore is expensive. We might not have homes that are as expensive compared to cities like Hong Kong, but you can't deny that homes are expensive, regardless of how anyone might try to spin it.

There is more cost to a home than just its selling price

It is normal to judge the cost of a home simply by looking at its selling price. People asked each other about that all the time. "How much did you pay for your home?"

However, the true cost of owning a home is a lot more than just its selling price. And if you are a potential buyer of your first home, we like to elaborate more on this so that you are not at the receiving end of a rude shock in the future.

1. Renovation cost

The first thing to prepare yourself for is to understand that home renovation may end up costing you a lot more than you expect, even if you are thinking of going for just "a simple renovation."

There are tons of renovation items that are going to cost you. The list is also more extensive than what some of us would expect. These include electrical works, lighting fixtures, air-con units, curtains, bathroom accessories, window grills, painting, cement screeding (go Google it if you don't know what this means) and haulage fee (yes, you got to pay money for someone to dispose your renovation rubbish). The list goes on.

What about the numerous articles that you see on Facebook promising beautiful HDB homes that costs less than $30,000 in renovation? We advise for you to take these articles with a pinch of salt.

Most of these homes you see on Facebook or websites cost a lot more than advertised because they do not include the furnishing costs of buying all the furniture that you see in the nice phots. Also, the renovation costs usually do not include simple items such as lighting fixtures that are critical, if you want your home to even look remotely close to what you see on the photos

In our opinion, you should expect to budget at least $50,000 for the entire renovation of a simple HDB home (including furniture and assuming you did not opt for HDB optional component scheme). If you are going for something like what you see on Facebook, be prepared to have about $70,000 ready, regardless of what the article actually promised. It's better to be safe than sorry.

2. Interest cost

Unless you have a few hundred thousands already sitting in your bank account doing nothing, you are likely to require a housing loan.

Interest cost is frequently ignored during property conversations. People like to boost that they bought a property at $400,000 and sold it at $600,000, thus netting for themselves a profit of $200,000, but is that really an accurate way to look at it?

Let us work out a simple hypothetical scenario.

Assuming a buyer bought a HDB flat at $400,000, and paid a downpayment of 10 per cent ($40,000), the buyer would need to take a loan of $360,000. If we assume the buyer takes a 20-year loan at the prevailing HDB loan rate of 2.6 per cent per annum, this is how the actual math would work out.

Based on our calculation, a $400,000 home would actually cost more than $500,000 once you include in interest cost.

3. Opportunity cost

This is a type of cost that very few people ever consider when buying a property. Most of us fail to realise that the money we spend on our home could have easily been used to help us generate returns if used in other investing instruments.

Going by the numbers we have used above, let us assume a home buyer who spent $50,000 on renovation and $40,000 on downpayment put his money in risk-free assets such as the Singapore Savings Bond at a return of 2.5 per cent per annum instead.

Here is how the returns pan out after 20 years.

That is not all. What if we assume the $1,925 spent on monthly mortgage had been invested also?

What this number of $598,626 is referring to is the amount we could have received if we invested the $1,925 per month in some risk free assets, instead of repaying our housing loans.

What do these numbers tell us?

When we add the renovation cost to the interest cost, what we get is the actual amount that we spent on our home. The total basic cost adds up to $552,000, excluding any maintenance cost incurred. So a person selling their home for $600,000 should not feel too excited.

The total opportunity cost adds up to $746,101. This figure represents the amount we could have received had we forgo buying a home, and instead used the money on some risk-free assets.

Of course an argument can be made that if the buyer had used part of the money to rent a home instead during the period, the actual returns would be a lot lower. That's a fair argument.

The simple conclusion we like to make is that while owning a home is still a good financial decision for the majority of Singapore households, it is worth remembering that the home we buy is significantly more expensive than what most of us realise.

DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.