Buying a property - 4 important things to consider

This article was originally on GET.com at: Buying A Property - 4 Important Things To Consider

Are you thinking of buying a property in Singapore? Or are you someone who has made that first foray in real estate some years back and is now sitting comfortably on a property that has appreciated? You pride yourself on that smart decision; regardless if the property you bought was for investment or if it is still your residential address.

With the current repressed property market, as a savvy and sophisticated investor, you have the stamina to hold on to your current property/properties but you do not want to lose out on the opportunity to 'buy low' as they say at this point. You want to get your hands on your next property.

Why not? Home values dropped for a ninth quarter in the last three months of 2015, posting the longest losing streak in 17 years, and last year's sales are set to be the lowest in seven years. The view forward doesn't look like prices are going to rebound as well.

According to investment management firm JLL, residential property prices in Singapore could fall by 4 per cent to 6 per cent a quarter, going by past correlation studies with the stock market. As property prices typically lag the stock market by one or two quarters, a further correction in property prices in the next few months is not unexpected. To top it all, cooling measures seem to be here to stay for a while.

Here, we at GET.com will show you 4 important things to consider before buying a property so that you can have a better idea of how much of a home loan you can get.

Things To Consider When Purchasing A Property

What is important for you is that prices look affordable and attractive to make an entry into the property market. However, although you are familiar with the theoretical aspect of the cooling measures, you may not truly understand how far reaching they are. Thus you may face obstacles in getting that loan approved or lack adequate collaterals and securitisation.

4 tips on paying for your first home

  • Financial advisers say you should plan your housing budget carefully before choosing your home and not the other way around.
    There are many tools available out there which first-time home buyers can use to plan their purchases.
  • For example, Mrs Nyang-Ngiam said, "they can make use of Our First Home Calculator available on the CPF website to assess the type of housing they can afford based on their income and ability to service the loan".
  • The experts also urge would-be buyers to consider the full range of costs and monthly bills prior to purchase.
    "Once you own the property, you will also incur other regular costs like utility bills, conservancy fees and management fees if your property is a condominium with facilities like a swimming pool, gym and tennis court," said Mr Vasu Menon, vice-president of wealth management in Singapore at OCBC Bank.
  • Saving for the down payment could take several years for most people, given the steep rises in property prices in recent years.
  • Property down payments for first-timers could range between 10 per cent and 20 per cent of the purchase price, depending on whether you buy an HDB flat or a private property and whether you finance this using an HDB loan or a bank loan. "Save at least 10 per cent of your income each month and do this before you even start spending," said OCBC's Mr Menon.
    He added that home buyers will need to build up a pool of funds through savings and investments.
  • One common question is whether to get an HDB loan or to borrow from the bank. They have their pros and cons.
    For instance, a bank loan requires a cash down payment of at least 5 per cent while an HDB loan allows full financing of the down payment using just CPF funds.
  • HDB loans tend to offer better interest rate stability, as the rate is pegged at 0.1 percentage point above the prevailing CPF interest rate. Thus, they provide relatively more stability than even a fixed-rate mortgage whose rate is fixed for only a certain number of years.
    But HDB loans also come with certain eligibility conditions.
  • Home buyers should also evaluate the impact of regulations on their financing options and costs, say the bankers.
    Some may still be unaware of - or do not understand - the total debt servicing ratio (TDSR) framework for property loans that was introduced last year, noted UOB's Ms Chia.
    The TDSR caps a borrower's monthly total debt repayments at 60 per cent of his gross monthly income.
  • A key financial consideration at this juncture is the outlook for interest rates, say the experts.
    "While rates are low for now, remember that they may rise in the coming years," said OCBC's Mr Menon. "When rates do increase, your monthly instalments will rise, and you should assess if this will pose a burden before deciding on the amount of loan you plan to take and the package you wish to sign up for."
  • Home buyers should also set aside sufficient funds to meet rising interest rates and any unforeseen circumstances.

    UOB's Ms Chia pointed out that for every one percentage point rise in the interest rate, the monthly instalment will rise by about $250 for a $500,000 loan stretched over 30 years.
  • To ensure financial liquidity, it is also prudent for home buyers to maintain 18 to 24 months of monthly instalments in their bank accounts, she added.

The worst-case scenario is to be caught in a situation where you have the financial means but you are still face with problems buying another property as you have difficulty getting a loan.

Let us take a deeper dive.

1. ABSD (Additional Buyer's Stamp Duty)

This tax was was first introduced in Singapore in 2011 and then it was revised on 12 Jan, 2013. The ABSD was introduced in Singapore as a measure to slow property investment and speculation.

When you purchase a residential property (HDB flats or Private Properties) you will need to pay this tax on top of the Buyer's Stamp Duty .

This has significantly increased the initial capital outlay when you are purchasing your 2nd and subsequent properties. One important point to note is that if a Singaporean purchases the property with a PR or a foreigner, the higher rate will apply.

2. LTV (Loan To Value)

Otherwise known as the housing loan quantum a bank or financial institution is willing to offer as a percentage to the valuation of the property in question.

Again, this was not spared from the far reaching impact of the cooling measures to curb property speculation and prices.

Here is what it looks like before and after the cooling measures:

Highlights:

- All residential property loans will only allow a maximum loan tenor of 35 years.

- If you take up a loan of more than 30 years or one that extends past the age of 65, you can either borrow up to 60 per cent of property value if you do not have an existing housing loan, or borrow up to 40 per cent of property value if you have an existing housing loan.

- The same rulings will be applied to refinancing residential properties.

- Non-individual borrowers will have a cap of 40 per cent LTV.

We have not taken property valuation into consideration. With a conservative approach adopted by property valuers these days, the cash portion to be paid upfront will also be significantly increased if the valuation does not meet the purchase price, adding to the burden of an already reduced LTV.

ABSD and LTV are only 2 of the suite of cooling measures the government has introduced to curb property prices and speculation. Some may argue that it has worked too well.

The other 2 components of the cooling measures are:

- TDSR - Total Debt Servicing Ratio

- MSR - Mortgage Servicing Ratio

3. TDSR (Total Debt Servicing Ratio)

It is not easy to understand the working of the TDSR first time around, especially for first time applicants of home loans. However, the objective of the TDSR is to prevent an individual from being overextended because of a property purchase.

Whether the property is for investment purposes or for owner occupation, it is to safeguard you from buying a property that is above your means. Translating this measure into facts and figures, we just have to remember this magic formula:

Total commitment / Total income <= 60 per cent

4. MSR (Mortgage Servicing Ratio)

MSR caps the amount an individual can spend on mortgage repayments to 30 per cent of a borrower's gross monthly income (excluding other commitments) and it came into effect on 12 Jan, 2013.

Unlike the TDSR, which is applicable to all housing loans, MSR applies to HDB flats and ECs (Executive Condominiums) including the refinancing of these loans. After which, they also have to fulfil the TDSR assessment of 60 per cent where all commitments will be included.

Can You Afford Your Dream Property?

The logic of these measures is simple but the impact to you as a property investor is greater than a straightforward mathematical question.

For those of you considering buying your first HDB flat, you can read about how much money you need for your first HDB flat here.

For those who are thinking of buying a condo, you can read more about how much money you need for a $1.5 million condo in Singapore.

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