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Monday, December 15, 2014

3 Considerations For Your New Home

1) Matured / Non-Matured Estates

In general, there is a relatively huge discrepancy between the prices of HDB flats in matured vs non-matured estates. Based on my opinion, it seems like the government’s plan to attract citizens to ‘populate’ the more sub-urban areas of Singapore (example: Punggol , Seng Kang).  


Punggol Waterway
Eco Estate in Punggol

By offering housing at relatively lower prices and developing the areas into modern, eco-friendly estates (e.g: Punggol Waterway) , it hopes to create more vibrant satellite towns and perhaps ease the human congestion in the matured estates.

For the people thinking of purchasing a new flat, these new estates represent attractive options, both in terms of pricing and being part of a young, dynamic community.

Now let’s take a look at the price comparison of a typical 4-RM (90sqm) Flat, in matured and non-matured estates.

(Reference: JUL-2014 BTO Exercise)

Price Comparison of HDB BTO
Matures Vs Non-Mature - Price Comparison

All else being equal, there is indeed a premium to pay when choosing a flat in a matured estate. Do seriously consider this point when choosing your BTO!.

HDB's Estate Classification are as follows:

Matured Estates: HDB Estates that are more than 20 years old. E.g: Bishan, Ang Mo Kio, Toa Payoh.

Non-mature estates: Bukit batok, Bukit Panjang, Choa Chu Kang, Hougang, Jurong East, Jurong West, Punggol, Sengkang, Sembawang, Woodlands, Yishun. 

2) Loan Amounts & Tenor

Loan Amount 

Buying a big house that is future proof (for kids,etc) is important! But equally important is whether it would take a toll on the couple's finances. Making the right decision will impact your quality of life when the financing your new home.

Here are a list of tools that would be most useful in helping you make the right choice in terms of your housing affordability. 

As a general rule of thumb, many people advocate a maximum of 30% (capped by HDB). I would suggest to set a max loan repayment % of about 20%. This will give you ample buffer (Mortgage payments via CPF installments) especially if you intend to have kids soon after marriage.

Case 1:
Combined Income: $10,000 
* Your combined income is key to how much money you can borrow

Percentage Of Income on Loan Replayment: 30%

Max Loan: $759,261
Monthly Installments: $3,000

30% Income on Repayment
Case 2:
Combined Income: $10,000 
Percentage Of Income on Loan Replayment: 20%

Max Loan: $445,815
Monthly Installments: $2,000

20% Income on Repayment
As you can already see from the illustration, it is important to buy a house that you can afford - without spending the rest of your lives being a slave to debt!

Tenor 

Bank
All residential property loans will only allow a maximum loan tenor of 35 years.
* Most banks will allow a repayment period of 30 years. 

HDB
The maximum loan tenor is 65 years minus the buyer’s age or 25 years, whichever is shorter.

The combination of the loan tenor and amount will determine your repayment schedule, as well as your monthly installments. Always live within your means !

3) Bank Or HDB Loan (Should I Repay Early ?)


Choosing between a Bank or HDB Loan is an important financial choice to make when buying a flat. This point is covered in one of my articles here

However, I will discuss an equally 'hot' topic on early payment of your mortgage loan.

- Using excess CASH in CPF Ordinary Account


For those intending to use excess CASH in your CPF, I would suggest to maintain at least 20,000$ in your OA before doing any lump sum repayment on your loan.

By maintaining an initial $20,000 in your CPF OA account, you would be able to enjoy an interest of 2.5% plus an extra 1% assuming the combined total CPF (OA +SA + Medisave) is less 60,000$. *Read more about it here

For those who are financially savvy (or can tolerate financial risk), excess CPF savings can also be invested in ETFs or REITs (which can yield in excess of 5%). 

- Using CASH on hand


There are several schools of thoughts when it comes to using cash on hand to do lump sum repayments. In summary, they are:

1) I want to be debt-free as early as possible

- Generally, these are the people who feel that excess cash on hand should be used to repay outstanding loans, to reduce the additional costs of interest over the remaining loan tenor.

2) I want to make my money work for me (Or even buy a 2nd property to generate rental yield)

- Generally, these are the people who feel that excess cash on hand should be used to generate passive income that will out-strip the costs of the loan’s interest (and even generate a nett positive return in the long run).

There is no cookie cutter, right-or-wrong method here. In my opinion, its best to choose whichever option that suits your long term financial goals. 


Image Credits: cpf.gov.sg, hdb.gov.sg