For most people, buying a property is a process that we typically only go through once or just a few times during our lifetime.
Even though choosing and buying a property is a big decision, and property investing is already a favourite pastime for many Singapore investors, a vast majority of Singaporeans are not familiar with the process of purchasing a property.
A recent PropertyGuru's Consumer Sentiment Study H1 2020 shared some important things about buying a property that many Singaporeans are unsure about.
#1 MOST SINGAPOREANS ARE NOT FAMILIAR WITH THE PROCESS OF TAKING A HOME LOAN
Despite topping the region as the top savers, most Singaporeans admitted that they were unaware of the process of taking a home loan. Only 18 per cent of respondents, according to the PropertyGuru's Consumer Sentiment Study H1 2020, were confident of the process of taking a home loan.
This isn't great. The process of taking a home loan isn't just about filling in the paperwork required correctly, but also about knowing one's ability to afford a home.
Most people buying properties need a home loan. However, if we are unsure about taking a loan, we may overestimate (or underestimate) the type of property we can afford, thus causing us to make a sub-optimal decision.
In some situations, buyers may even end up losing their option fees if they are unable to secure the loans needed for them to complete their property transactions.
#2 ARE SINGAPOREANS EVEN GETTING THE BEST RATES FOR THEIR MORTGAGE?
To a certain extent, taking a home loan is like getting a handphone plan. To enjoy the best deals, you need to continually be on the lookout for a better plan whenever it's time to renew your contract.
At times, you may even need to switch (or threaten to switch) telco providers to get a better deal. The same logic applies to refinancing your home loan.
According to PropertyGuru, about 2 in 5 Singaporeans are not aware that they can even refinance their home loans to save on monthly costs.
Interestingly, this is more apparent among lower-income groups, which one might expect would and should pay more attention to such cost savings.
A property loan is typically the largest loan many of us take in our lives so it's logical to make sure we save as much interest as we can on it.
For example, if you have taken a $600,000 loan over 20 years, at an interest rate of 2.0 per cent, you will pay $3,035 each month.
If you don't refinance after the lock-in period, the interest rate you pay typically increases. Assuming it goes up to 3.0 per cent p.a., you will now be paying $3,328 per month, or about $293 per month. That's similar to the combined cost of utility and telco bills for many households!
#3 SOME SINGAPOREANS ARE LIKELY TO BE OVERSTRETCHING THEMSELVES
2020 is off to a pretty bad start, especially if you are a property owner who has overstretched himself.
Mortgage defaults are on the rise in Singapore over the past years as the economy continues to slow down. As with any investments bought using leverage, once forecasted cash flow starts to decline, affording the monthly repayment with interest becomes difficult.
Ensuring that you can qualify for a home loan is one aspect of affordability. Being actually able to afford the mortgage in the long-term is another factor.
For example, a couple whose combined earning is $12,000 may be able to get a loan today to upgrade their existing HDB flat to a condominium. However, this will not be the case if one of them stops working in the future. The condo they can "afford" previously is no longer affordable.
Before you even decide to start your search for a new home, you should first calculate how much you can realistically afford.