What you need to know about buying your first home
Tips for first-time home buyers in today’s market
WITH home prices still rising across the board, many young Singaporeans may be wondering if they can afford a property and what their options are.
The good news is that Singapore’s home ownership rate remains one of the highest in the world at nearly 90 per cent. This is due to the accessibility of government-backed public housing flats and generous grants given to first-timers purchasing new Build-To-Order (BTO) flats. Many millennials also enjoy financial support from their parents when they purchase their first homes.
As most Singaporeans eventually become home owners and properties are the priciest assets they will ever own, property literacy should start as early as possible.
What type of homes should first-timers consider?
Data from the Department of Statistics show that in 2022, about 78 per cent of resident households lived in HDB flats, while another 17 per cent resided in condominiums and apartments, and 5 per cent in landed properties.
For first-timers and especially young households, BTO flats may make the most financial sense.
First-timers should choose homes they can best afford, and BTO flats are considered the most affordable housing in today’s market. BTO buyers must meet HDB’s income ceiling and eligibility criteria. Singapore citizens or Singapore permanent residents buying a four- and five-room flat with their fiancée, spouse or family members cannot have a combined income exceeding S$14,000, and cannot be owners of private property.
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Outside the BTO market, buyers face fewer restrictions, but need to have sufficient cash and funds in their Central Provident Fund accounts to pay the down payment (and Cash-Over-Valuation or COV for HDB resale flats), as well as budget for a bigger monthly loan repayment.
Over the past decade, many HDB flat owners have upgraded to condos as they found it easier to progress up the property ladder with the capital gains from their first flats. Due to the low entry costs and high subsidies, almost all BTO flats are profitable, and most flat owners can make gross profits of at least S$100,000.
There are also many young executives, especially those with high incomes or financial support from their families, who have bought private property as their first homes in recent years. They usually buy mid-sized suburban condos for long-term investment or small apartments in the city fringes for rental income.
How much should you pay for your first home?
Before sealing a deal or paying top dollar for a particular unit, first-timers should assess their financing abilities and consider if the total debt repayments will significantly deplete their life savings.
Buyers’ budgets are constrained by the Total Debt Servicing Ratio (TDSR), which determines how much home buyers can borrow. Those purchasing new HDB flats and executive condos (ECs) are further subjected to the Mortgage Servicing Ratio (MSR), which is capped at 30 per cent of a borrower’s gross monthly income.
Even if a buyer passes the debt servicing assessments, maximising one’s borrowing limits is not advisable. Buyers should allow some liquidity buffers to weather a financial downturn, potential job loss or stressful event. They should also set aside an emergency fund of about six months’ worth of expenses and mortgage repayments. This fund can be kept in some form of low-risk, liquid investment, cash or accessible funds. Young couples with children should further allocate some budget for home repair and maintenance costs, insurance, utilities, childcare fees and enrichment classes, and paediatric consultations, which can be costly.
BTO flats are typically priced below comparable resale flats by about S$150,000 or more. After subsidies, about 80 per cent of first-time BTO homebuyers are able to pay their monthly mortgage instalment fully with CPF.
Before placing an offer on a new home, consider getting a pre-approved loan from banks or apply for an HDB Loan Eligibility (HLE) letter, to gauge how much can be borrowed.
Prices of new four-room BTO flats in non-mature estates ranged from S$248,000 to S$418,000 in 2022. In comparison, the median price of similar flat types in the resale market was about S$515,000 in January-February 2023. New four-room flats in mature estates cost about S$381,000 to S$695,000, while resale equivalents transact at around S$600,000.
In addition to budgeting for the down payment and monthly instalments, buyers must also keep in mind that they will need to pay for transaction costs such as stamp duties, legal fees and miscellaneous costs, which may go upwards of S$10,000. Property tax is also payable, and could range from a few hundred dollars to a few thousand dollars a year.
Here, we look at four possible scenarios. Our calculations have not included subsidies and grants available.
Four-room BTO, non-mature estate, S$350,000: A four-room BTO flat in a non-mature estate costing around S$350,000 will incur a S$70,000 down payment based on a 25-year HDB loan. Monthly repayment will be around S$1,270. A pair of graduates who have worked for about four years with a monthly salary of around S$3,500 each can cover the down payment and pay the monthly instalment using their CPF without incurring cash.
Four-room BTO, mature estate, S$500,000: For a S$500,000 four-room BTO flat in a mature estate, a down payment of S$100,000 will be required, with a monthly repayment of about S$1,815 based on a 25-year HDB loan. To fully finance the mortgage using CPF, a fresh graduate couple must have worked for around five years with salaries in excess of S$3,950 each.
Four-room resale, non-mature estate, S$515,000: Buyers looking at a four-room resale flat in a non-mature estate at a median price of S$515,000 will need to place a down payment of S$103,000. Based on a 25-year HDB loan, monthly repayment will be around S$1,870. A couple will need a monthly salary of around S$4,100 each or a combined income of S$8,200, and have worked for four to five years to save enough for the down payment and the monthly instalment to be fully financed using CPF funds.
Eligible first-timers can get up to S$190,000 in grants for resale flats. These include up to S$80,000 in CPF Housing Grants, an additional Proximity Housing Grant (PHG) of S$20,000 if they live within 4 km of their parents, or S$30,000 if they stay with their parents. The Enhanced CPF Housing Grant (EHG) also provides for up to S$80,000 in grants based on household income and eligibility status.
Three-bedroom EC, S$1.3 million: For first-timers eyeing a three-bedroom EC costing about S$1.3 million, the couple will need to take a bank loan and will incur a 25 per cent minimum down payment of S$325,000, of which S$65,000 or 5 per cent of the total price must be paid in cash with the balance coming from CPF. Based on a 30-year loan at an interest rate of 4 per cent, the remaining S$975,000 balance will translate to around S$4,655 in monthly mortgage payments. As EC buyers must pass the 30 per cent MSR criteria (that is, the mortgage payment cannot exceed 30 per cent of gross monthly income), the couple must have a minimum combined monthly income of S$15,520 or S$7,760 per person to be able to take that loan. For EC buyers, combined income cannot exceed S$16,000.
If the couple earns less, say S$5,000 each or a combined monthly income of S$10,000, the maximum monthly loan instalment they will be able to take will be S$3,000 based on the MSR. Thus, they can only borrow up to S$630,000. For the S$1.3 million EC, the couple will face a down payment of more than S$670,000.
How to reduce your cost of purchase?
Buyers should look into available subsidies and take advantage of the financial assistance available. More help will be given to first-timers this year, as announced at Budget 2023. The CPF Housing Grant has risen by S$30,000 to a total of S$80,000 for qualifying buyers of four-room or smaller flats, while others can receive S$10,000 more or S$50,000 in full if they were to purchase a five-room or larger resale flat.
Plan long-term and buy units that are easier to resell
Weigh all options carefully. Consider the convenience and practicality of staying in a specific location and if the unit offers sufficient space to bring up children. As properties become pricier and replacement costs increase, buyers should also take a longer-term perspective when buying their first homes. Choosing a home that fits the mid-term goals will provide more flexibility.
ECs have been growing in popularity for their relative affordability next to private property, and high capital returns. An EC project is privatised 10 years after completion; thereafter, units can be sold to foreigners.
Some first-timers are caught in a bind when they realise a few years later that they require a bigger space or need to live closer to their preferred primary school to secure places for their children. Others may struggle with childcare arrangements if they live too far from their parents, or spend too much time commuting to the office.
Choose homes that are easier to resell or lease. Proximity to amenities, greenery and scenic views often enhances the valuation of properties. Buy a place you prefer and best suits your needs. If you like your home, your next buyer will probably like it too.
The writer is senior vice-president of OrangeTee & Tie Research & Analytics
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