Mistakes You Should Avoid
Not comparing different home loan packages
If you’re taking out a housing loan from a bank, you’ll need to pay attention to the different packages available.
One of the most important ways packages differ is by how the interest rates are set. Some packages are floating-rate loans, while others are fixed-rate loans.
Apart from that, look out for these other features of your home loan:
Lock-in period. This is a period of time (generally a few years) where you’ll have to stay with your home loan package. If you’re switching banks before this period is up, you’ll have to pay a penalty – typically around 1.5% of your outstanding loan.
Partial prepayment penalty. Say you’ve received a big influx of cash and would like to put it towards reducing your outstanding home loan. However, if your bank imposes a prepayment penalty, you’ll have to pay a fee for doing so, which could negate the interest savings from reducing your outstanding loan.
Early redemption penalty. Similarly, if you pay off the entirety of your mortgage early, you may have to pay a penalty.
Closing costs. Consider how much you may need to fork out for closing costs, which are costs associated with finalising the loan. Different lenders may have different closing costs, and you may be able to ask your lender to subsidise certain costs.
Using all your savings as down payment
You’ve been socking aside money for years, and you finally have enough saved to afford the minimum down payment on a home. Here’s why you shouldn’t blow out all your savings:
You need buffer savings. If you lose your job or source of income, or suddenly incur a huge expense, having zero savings will make it hard to cover costs.
Homeownership incurs additional costs. In addition to the mortgage, there are other costs associated with homeownership, such as maintenance and repair expenses. If you clean out your savings, you may have trouble covering these costs when they unexpectedly arise.
Your savings will become illiquid. Once your savings are tied up in your home, they will become illiquid, which means that they will become hard to access quickly should you need them.
It’s best to keep part of your savings when forking out for the down payment. Make sure you buff up your emergency fund as well so you can cover your mortgage and other living expenses for a few months.
Incurring high mortgage payments
In Singapore, two regulations limit how much you can spend on monthly mortgage repayments:
Total Debt Servicing Ratio - Monthly debt obligations, including mortgage repayment and other forms of debt, cannot exceed 60% of total monthly income
Mortgage Service Ratio - Monthly mortgage repayments cannot exceed 30% of your total monthly income
When you spend a huge chunk of your income on housing, it becomes harder to manage your living expenses. Don’t forget that there will be additional costs of homeownership, such as utility bills, maintenance costs and property taxes. Spending more on housing also means less money allocated to other financial goals, such as family vacations, your child’s education or saving for retirement.
Experts suggest spending no more than 25% to 30% of your monthly pay on housing – this includes mortgage payments and other costs of homeownership.
If you’re not doing so already, start tracking your budget. This could help you figure out how much you can comfortably spend on your mortgage repayments, and whether you need to cut back on other expenses in order to afford a home.
Underestimating the other costs of homeownership
As a homeowner, your recurring expenses will go beyond your mortgage. You’ll also have to take into account:
Household repair and maintenance costs. Leaky pipes, spalling concrete, faulty wiring – these are just a few of the problems that could plague you as a homeowner. The cost of repairing spalling concrete for the ceiling of a HDB toilet alone can cost around S$1,200.
Condominium/HDB maintenance fees. Condo maintenance fees could set you back a few hundred (up to S$1,000 for luxury condos) a month, while Service and Conservancy Charges (S&CC) for HDB flats will cost you up to around S$100, depending on your flat size.
Property taxes. The amount of property tax you have to pay is calculated by multiplying your property’s Annual Value (which is derived by determining your potential rental income) by the prevailing tax rate.
Utility and internet bills. According to Numbeo, basic utilities for a 85-metre apartment could cost around S$139 a month. In addition, moving to a new home for the first time means that you’ll have to fork out for an internet plan.
Blowing the home renovation or furnishing budget
If your new home requires renovation, you may have to fork out thousands. In the first half of 2017, the average value of a renovation contract was S$11,711. According to renovation platform Qanvast, light renovation on a 4-room HDB flat (90 square metres) could cost around S$17,900 to S$21,480.
In addition, if you’re buying new furniture, furnishing your entire home could cost you tens of thousands of dollars.
If you haven’t budgeted for these costs, it could take a huge hit on your finances. Before you purchase a property, it’s best to take stock of what renovation work you will require, and how much it may cost you.
Homeowners on a tight budget can also look for cheaper furnishing alternatives. You could scour platforms like Carousell for second-hand furniture or even get on Taobao for smaller items.
Preplanning helps you avoid common pitfalls
Homeownership is a big financial move – it’s possibly the biggest purchase you may ever make in your lifetime. Deciding to buy a home is only the first step, as there is much to consider before making the leap.
So don’t step in without a plan: with a bit of preplanning, you can avoid some of these common pitfalls that plague first-time homeowners.
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