Isn’t crazy to trade 30 years of our lives to own a property and be its financial slave!
Seriously! Imagine paying off a dream home completely only at age 55 to enjoy it.
Unlike buying a fancy dress for your girlfriend’s birthday present, a commitment to a 20 to 30 year mortgage loan is a major decision, if not the most important decision of an average Singaporean.
Here are the common considerations that most home buyers overlook:
1) Does your remuneration commensurate with your mortgage loan repayment scheme throughout the loan term?
For example, theoretically, you want to repay the loan more when your earning capacity is higher in your younger years.
As you grow older, although your remuneration increases with experience, there is no guarantee that you earning capacity shall always remain the same.
Most mortgage repayment plan has a higher interest portion than principal during the initial repayment years. It’s only wise to get clarity on the type of mortgage repayment plan from the bank before you commit.
2) If you take up the maximum loan of 30-year, do your maths before you consider selling or upgrading your home as it may take more than 10 years just to pay off the interest portion.On top of that, if you use CPF funds, upon liquidation of your property, the principal CPF amount plus all the years of compounded interests (e.g. at 2.5% p.a.) will be carved out from sales proceed and refunded back to your CPF Account, leaving you, sometimes, with negative cash at hand.
If you have already committed to an upgrade purchase before your sales proceed, you may end up taking an additional bridging loan as a result of this miscalculation.
3) What’s the point of having a dream home if it’s empty without decoration?
If your maths involved only the mortgage loan calculation, you are in for a disappointing surprise.
Apart from the booby trap of ending up with a bridging loan should you miscalculated from an upgrade of second property, first property buyers usually do not escape the destiny of taking up a personal loan as a “bonus” to the main mortgage loan.
When I got married, my husband and I went shopping for the new home we created. Every electrical appliance and furniture we saw seemed “cheap and reasonable” on its own.
I had to stop my husband’s excitement in committing to each “cheap” purchase at random until we listed all the things that we want to buy. To his horror, it added up to a pile that we realized we couldn’t afford having all of them.
We went through the list meticulously to either “downgrade” a TV size or off non-necessities to avoid taking up any unnecessary personal loan. The same goes with renovation loan.
4) Have a good mix of cash and CPF monies for the repayment.
You may want to consider paying more with CPF monies and less cash at the early stage of your life cycle when cash is most needed to sustain your lifestyle.
However, when the banks are only paying less than 1% interest on your cash savings as compared to 2.5% interest on your CPF funds, the rest is simply logic if you do the maths of compound interest.
5) Whenever possible, borrow from parents or relatives and make sure you pay them back as if it’s a personal loan taken from a bank.
Your willing parents and relatives will not charge you interest like the banks. Just repay them with the same interest amount at the average banks’ savings interest rate.
In short, try to do a holistic plan when you are ready to dive into a commitment of your dream home, be it the first or second or third.
Work out the sums of total and assess your overall financial status with regards to available cash and CPF funds. Follow the interest rates of the local banks closely and make a point to review, adjust your loan repayment plans each year.
Personally, I always set aside a sum from my yearly bonus and do a lump-sum repayment to reduce my loan amount during my yearly loan repayment review.
You would be thanking me when you get to know the amount of interest savings you get from just shortening your loan repayment period by 2-3 years over an original 30-year.