After doing more than 30 FB Live videos on Singapore property, there are very common questions that people will routinely never fail to ask.
Some of the most common enquiries I will get:
- Is this XXXX development a good buy?
- Do you think it is a good idea to sell my HDB flat?
- Should I buy this property for rental returns?
No matter what are your questions – we need to go back to the basics – which is your financial figures.
Can You Really Afford a $1 Million Property?
I recently came across this case of a young couple who has a combined household gross income of $6500 per month.
Now assuming they want to buy a $1 million property – this would mean taking up a loan of $750,000.
Since they are a young couple, they are able to take a 30-year bank loan. We want to be conservative – so we assume a 2.5% interest rate.
Based on a 2.5% interest rate, this will mean a monthly installment payment of about $3,000 per month.
Based on a monthly installment of $3000 per month, this means 46% of their combined household income is channelled towards paying for their home.
This is financially unwise and very dangerous.
If one of them were to lose their source of income – this will mean that are in grave danger of not being able to service their loan.
The 30% Rule
For safety sake, you should never use more than 30% of your combined household income to service your mortgage loan.
If your combined household income is a gross income of $10,000 per month, you can set aside $3000 per month to pay your monthly installments.
This $3000 per month can be a combination of both husband’s and wife’s CPF account contributions.
CPF Contribution: $1260
CPF Contribution: $840
The total CPF contribution which is $2100 per month – makes it easier to service a $3000 per month monthly installment.
In this particular example, there is a top up of $900 of their cash savings as the CPF monies is able to cover bulk of the monthly mortgage.
Go ahead and login to your CPF account. Check how much contribution you are receiving per month from you and your employer.
Setting Up of a Reserve Fund
The reserve fund is another way to create a backup and secure your funds – to make sure you allocate your monies well for your property monthly mortgage.
In the event of job loss with no CPF contributions – the reserve fund is key to making sure you can still make the monthly payments easily.
This is important as finding your next job might take some time.
We will usually structure the reserve fund in such a way that you can still service your loan for at least 5 years or more – even in the event of zero CPF contributions.
I have personally encountered cases where one person can be without CPF contributions and have zero income for up to 8 years! – and still be able to make their monthly payments with no worries.
Assuming you sell your HDB flat to upgrade to private property – any gains you made from the sale will be allocated to the reserve fund. Again – this is to make sure that you are prepared in the event of emergencies.
Using Your Retirement Monies For Your Property Payment
We cannot ignore this fact – you are essentially using your CPF monies upfront and parking it in your property.
Even if you are staying in a HDB, majority of people still service their HDB loans via their CPF monies. Not a lot of people will pay for their monthly housing mortgage via cash.
As I mentioned in my older blog posts – you give up the security of earning a guaranteed 2.5% interest rate in your CPF OA to park the monies to your property instead.
So now the question to ask yourself:
- Is it a good idea to park your future retirement monies inside a HDB?
- Or is it a good idea to park your future retirement monies inside a private condo?
Which has the higher likelihood of appreciating more than 2.5% per year?
Your HDB or a private condo?
The truth is – I don’t know.
I don’t know if your current HDB can appreciate more than 2.5% per year.
I also don’t know if your existing condo can appreciate more than 2.5% per year.
In order to find out, we need to take a look at transaction data of HDB flats around your area.
If you are staying in a condo, then we need to check what are the most recent transaction cases of units in your development.
Whatever it is – your property will make up a significant chunk of your future retirement nest egg – you will need to check on its status.
Is it going to pull you towards a comfortable retirement or push you to work even in your golden years?
Before making any big financial decisions, I recommend getting clarity by understanding the numbers of your purchase.
There is no obligation to follow any of my recommendations – my job is simply to present to you your own unique financial position and where you stand with your existing property.
Of course, you can choose to do this later – but doing it later means you just get older and get into more financial commitments.
Procrastinating only means a shorter loan tenure and larger monthly payments.
Come together with your spouse and we can explore your potential options that are realistic and grounded on the actual financial figures.
Find out if you can afford a $1 million property or a $2 million property.
Maybe even find out if is better to stay put in your existing property instead to prevent falling into a financial disaster.
Drop me a whatsapp message or fill up this form to arrange a discussion.