Many Singaporeans rush to buy a flat as soon as they can. Unfortunately, “as soon as you can” is not the same as being ready. A flat is a major commitment, that can end up destroying your finances and lifestyle if you don’t prepare accordingly.
Here’s why it may not be the best idea to buy a flat, just because you barely qualify for that home loan:
As a Homeowner, Your Flat is More a Liability Than an Asset
For investors, property can be an asset as they’re not living in it. They’re able to rent out the flat, and ideally generate more from rental income than the loan repayment. For example, if their mortgage costs S$4,000 a month, but they rent out the flat at S$4,500 a month, their property becomes a cash generating asset.
Even if investors can’t make up the mortgage in rental income, they have holding power- they can afford to keep servicing the mortgage, as the rental income will offset a large portion of their monthly repayment.
As a home-owner however, your situation will be different. Even if you’ve met the Minimum Occupancy Period (MOP) of five years for your HDB flat, you can’t rent out the whole unit as you and your family need to live in it (unless you can afford to buy another flat without selling your flat).
While you can rent out rooms in your flat (if it is three-room or bigger), you need to consider how comfortable an arrangement this will be. Are you willing to live with strangers under your roof for several years? And keep in mind, renting out one or two rooms may not cover your entire mortgage, so the flat might still be a liability.
Before you buy, be clear on one thing: your flat is going to be a hefty burden on your finances for the next 25 to 30 years. It is not a decision to rush into.
The Demands of a Mortgage Might Rob You of Some Opportunities
If you insist on buying a flat while young, you have to brace for a simple reality: you will lose out on certain opportunities.
Your money will be tied up in the flat, so it’s probable that entrepreneurial ventures – such as trying to start your own company – are going to be out of the question. You may also find that, due to the high cost of the monthly mortgage, you lose out on other investment opportunities (e.g. building a bigger stock portfolio or buying bonds).
Finally, there are lifestyle opportunities that you won’t have. Servicing a mortgage means giving some of the things that keep you going, like trips abroad or the occasional shopping spree. Make sure you get the desire for these things out of your system, before you commit to a mortgage.
There’s no way to buy back 10 or 15 years of your life, if at the age of 35 you find nothing but regrets at what you’ve missed.
Buying Private Property Excludes You From Buying an HDB Flat
Before you put down money for a condo, remember you can’t buy an HDB flat once you do so. Consider this before purchasing properties such as shoebox flats, or studio apartments that are too small to accommodate a family.
What happens if, in the course of the next 20 years, you meet the right person and decide to settle down? Your tiny private apartment won’t be sufficient space for you to raise a family in; and at the same time, you can’t buy an HDB flat as you own a private property.
You might think it’s easy to sell off the private property and buy a flat, but don’t forget housing prices fluctuate. Since 2014, for example, Singapore’s property prices have been continually depressed. Should you be forced to resell during such a downturn, you might end up making a loss.
It Can Be Dangerous to Wipe Out Your Savings on a Cash Down Payment
You may have to use a cash down payment for the flat. You can avoid having to do this in theory, if you can get an HDB home loan that gives you the full 90% financing for your flat. But in the event you can’t get the full financing – or you have to use a bank loan – you’ll need a cash down payment.
(For bank loans, a minimum of five per cent of the property price has to be paid in cash. So a S$500,000 resale flat would mean S$25,000 in cash).
If this down payment would wipe out your entire savings, you are better off waiting a few years, and accumulating more cash (or qualifying for a bigger loan).
Consider what would happen if you spend all your savings acquiring the flat, and then run into a situation such as unemployment or a medical emergency. You might be unable to service the mortgage while dealing with your crisis.
Buy a Flat Early If You’re Financially and Mentally Prepared
There are some upsides to buying a flat when you’re young. You will get a longer loan tenure and you’ll finish paying off the flat sooner (which helps near retirement). You may even find that it brings peace of mind rather than stress, because your family won’t have to live with your parents.
But the key is to buy when you’re prepared, not just “as soon as you can”. That will ensure you end up owning a flat, without a decade of regrets along the way.
Work out your own life goals and financial needs, to see a mortgage can fit into the equation. There may be other aspirations you need to satisfy first, before you’re ready to commit. Beyond that, ensure that you have sufficient savings set aside to cover six months of the mortgage – either in your CPF Ordinary Account, or in cash.
This will guarantee you can keep servicing the mortgage during a crisis. Six months buys you the time to either recover, or to sell the flat without slashing its price.
This article was first published in SingSaver.