Marriage messes with the heads of even the most organised of Singaporeans. While you might have tracked every cent you spent religiously as a single, merging your finances with another person when you tie the knot has the ability to throw even the most ngiao of us off, at least for a while.
Joint accounts, supplementary credit cards and shared expenses aren’t easy to keep track of, especially when there’s someone else who’s incurring expenses you might not be aware of.
Add to that the sudden onslaught of huge expenses like the purchase of your first home and the arrival of a baby, and you can see why some couples abandon trying to keep track of their spending.
Don’t give up! Here’s why loan repayment calculators are a tool that you should definitely use before you commit to buying a home, or indeed, any big purchase.
How to use loan repayment calculators to plan your finances as a couple
For most couples, the purchase of a home is the first huge financial commitment they’ll be making.
So it’s quite shocking that many couples ballot for an HDB flat without really letting the extent of the financial burden they could be taking on sink in.
Well, buying a home shouldn’t have to involve vagaries and guesswork. Here’s a step-by-step guide to using a loan repayment calculator to know what you can afford when you buy a home.
1) You should start out with an approximate budget for your new home. Never mind if you’re not sure whether you can afford it yet. You’ll know soon enough.
2) First, you want to educate yourself on the home loan options you have and know the difference between a fixed and floating interest rate mortgage. Decide which one would be better for you.
3) Then compare interest rates of the various banks online, using MoneySmart’s home loan wizard. You should get a pretty good idea of the kinds of interest rates you’ll be paying.
4) Now, subtract the downpayment and use a loan repayment calculator online (such as this one from PropertyGuru) to see how much you’d have to pay each month given a certain loan amount and tenure. You may have to increase the tenure or lower your budget if you can’t arrive at a monthly repayment sum you’re comfortable with.
5) Check that the TDSR rules don’t bar you from borrowing the amount of cash you’re looking at. According to the TDSR rules, you cannot spend more than 60% of your income on loan repayments—this includes not just your home loan but also all other debt, including car loans, credit card debt and student loans. Too confusing? Use this TDSR calculator here. If you find that you can’t borrow that much thanks to the TDSR rules, you’ll have to either lower your budget or increase the loan tenure.
Budgeting as a couple
Now that you know how much you’ll potentially have to fork out every month for your dream home, you can take a look at your finances to see if you can really afford it.
Let’s say your combined monthly income is $8,000 and you don’t have any other loans. That means the TDSR rules technically allow you to borrow up to the point where you are paying $4,800 a month.
But that doesn’t mean you should borrow that much. You need to look at your actual financial situation and see how much you spend every month, as well as how much you need to save and invest in order to reach your retirement/other financial goals.
So let’s say out of your $8,000 combined income, you spend $1,000 every month on food and dining out, $1,000 on necessities like phone bills, household contributions and so on, $1,000 on outings and entertainment, $300 on transport, $200 on your child’s education and $1,000 to support your respective parents.
(If you have no idea how much you spend, use an app together with your spouse to track where every cent is going for two or three months.)
That means that every month, after deducting all your spending, you are only left with $3,500. Out of this $3,500, you should be putting aside some money for saving and investing. Let’s say you decide to put aside $1,500 every month for that purpose.
That means the amount of money you can spare for a home loan is now only $2,000 a month.
Now, use the loan repayment calculator to work backwards and figure out how much money you can comfortably borrow while still keeping your repayments at $2,000 a month or less.
If every couple did this, there would be fewer people biting off more than they can chew when purchasing a home.
This article originally appeared in MoneySmart.