In my role as a financial planner, I observe a worrying trend amongst the many young professionals whom I advise and speak with.
Whenever I ask them about their three-year term goals, many will list purchasing their first home as one of their top priorities. However, they often admit that they don't really know where to start nor understand the necessary considerations when it comes to buying their first homes.
We all know that buying a property is a huge financial commitment. This is especially true in Singapore, where a large amount of our money is tied up in real estate (and usually over a long period of time). An unwise investment could lead to dire consequences which could take years to reverse.
This challenge is further compounded because when young professionals commit to a property, they are rarely in their peak earning years. They also do not have many people they can turn to for sound advice. A common complaint is that few financial consultants understand the implications of property purchases, and seem more interested in marketing financial products, while some property agents are more concerned about selling units than in properly advising these young professionals in the purchase of their first homes.
Fundamentally, as a first timer, the approach to buying a first property has not changed. Most look at location to suit their needs and affordability. However, external factors do vary from time to time depending largely on macro-economic factors.
The present climate offers a good opportunity for first timers to purchase their home. While multiple-properties owners are taxed heavily on their purchase, first timers are only required to pay the nominal stamp duty. First timers are also able to benefit from moderating property prices which cooling measures introduced.
Together with Mr. Zavier Zhang (Associate Senior Marketing Director at Huttons Asia), who specializes in helping first time home buyers own their dream homes, we offer the following 4 tips for first time home buyers.
These four tips (or 4Ps) are: Priorities, Products, Planning and Prudence.
Tip 1: Determine your Priorities
There are many considerations to mull over with your spouse with regards to your first place. Examples include: Location, proximity to parents, workplace, child's future school, affordability, growth opportunity, waiting time, unit size, extent of renovation, etc.
Especially for resale units, there are many other factors such as level, facing, condition, neighbours, etc.
Take time to go through these issues together. There are some issues which are a definite priority over others. For instance, if your parents assist you with childcare, a priority would be to live near to them. This will allow a shorter time to collect your children after work, as well as possibly enjoying the Proximity Housing Grant. Have a common understanding before embarking on your search. It is normal to fine tune your requirements along the way.
Tip 2: Find out about the available Products
There are many different options. But do understand the pros and cons of each.
- A Build-To-Order (BTO) flat is the most common option, but its biggest disadvantage is its waiting time. You are also limited by the timing of the BTO launch and by the locations offered.
- A Sale of Balance (SBF) flat is a good alternative to BTO flats but the supply of SBF flats is limited. This is a good option if you yearn for a mature estate location with little waiting time. Price though will be steeper and balloting odds are low.
- A resale HDB, while pricey, is another choice for mature estate. It has the least waiting time and also a bigger unit size.
Besides HDB, you may also consider Executive Condominiums (ECs) and private property. For aspiring individuals, an EC is a great choice. It is almost identical to a private condominium except for its income limit and Minimum Occupation Period (MOP) requirement. Most importantly, it is heavily subsidised and is proven to register huge gain when the MOP is completed.
Tip 3: Ensure that you are Planning ahead
The Minimum Occupation Period (MOP) of five years begins when you receive the keys. For BTO, this can mean a wait of at least 8 years after the construction phase is added. This information must therefore be considered alongside your marriage plans.
One prime consideration you may have to plan for are living arrangements with your parents or your in-laws, i.e., will you be staying with your in-laws or your parents? MOP not only prevents the couple from selling or subletting, but you are also unable to make forays in other property investments (either local or overseas).
Because a large amount of your money is tied up, when poorly timed, this restriction will definitely have a bearing on your longer term financial planning decisions such as family and retirement planning, which would then have a knock-on effect on your immediate lifestyle choices.
Tip 4: (Financial) Prudence
Now that you have decided what your first property will look like, here is how you can go about financing it.
- The first thing to do is to submit an application for HDB Home Loan Eligibility(HLE) and conduct a quick assessment using the maximum loan enquiry online.
- Determine the amount of your combined CPF Ordinary Account (OA) and cash available for purchase. This is where a loan assessment with banks will most certainly be helpful.
- Another important consideration is the mortgage servicing ratio (MSR), which caps the amount that may be spent on mortgage repayments to 30 per cent of a borrower's gross monthly income.
- You will be at a huge advantage if the monthly instalment is covered by your combined monthly CPF contribution. Your take-home-pay can then be used freely for other necessities.
- Finally, always ensure that your dream home is an asset you and your loved ones can enjoy for years to come by choosing the right mortgage insurance and personal insurance coverage. This is because in the event of premature death and disabilities like injuries and critical illnesses, your dream home may instead become your loved ones' nightmare as they are suddenly burdened by the mortgage repayments or even worse - be forced to liquidate the property and lose the roof over their heads.
All in all, our first property is usually the major determinant of our wealth in the first 10 years- the first pot of gold that everyone covets. So do take time to evaluate your options and always consult a professional when in doubt.
Seng Bingyang is a financial planner who helps young professionals achieve financial goals by growing and protecting their wealth. He is listed on Consultwho.sg - visit us to ask a question anonymously, connect with a financial consultant, or read helpful guides and advice. Like us on Facebook to receive updates on interesting content!