Do you realize that it’s crazy to trade 30 years of our lives in order to own property in Singapore, making us a slave to our homes?!
Seriously! Imagine paying off for your dream home completely only at age 55, before finally getting to enjoy it.
On a positive note, you could say you’re motivated to keep upgrading yourself such that your job security is assured for at least 30 years.
On top of keeping your job, you’ll need to ensure that your yearly pay increment keeps up with or surpasses the yearly inflation rate.
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.
To many, it’s the most important decision of the average Singaporean.
What are the common considerations that most home buyers overlook? Here are 5 booby traps homeowners must absolutely avoid at all costs.
Trap 1) Having A Mortgage Loan Repayment Scheme That Doesn’t Match Your Income
You may want to repay more of the loan when your earning capacity is higher in your younger years.
While your remuneration increases with experience as you grow older, there is no guarantee that your earning capacity shall always remain the same.
Most mortgage repayment plans tend to have higher interest rates during the initial repayment years. It’s wise to be clear on the type of mortgage repayment plan from the bank before you commit.
Trap 2) Taking Up The Maximum Loan Period Of 30 Years
Before you sell or upgrade your home, be aware that it may take more than 10 years just to pay off the interest portion.
On top of that, if you used CPF funds to buy your home, the principal CPF amount plus all the years of compounded interest (an average of 2.5% p.a.) will be carved out from sales proceeds and returned to your CPF Account, sometimes leaving you with negative cash in hand.
If you have already committed to an upgrade purchase before your sales proceeds, you may end up taking an additional bridging loan as a result of miscalculation.
Trap 3) Failing To Set Aside Money For Furnishing The Home
If your budgeting involved only the mortgage loan calculation, you are in for a shock!
Apart from the booby trap of a bridging loan should you miscalculated from an upgrade of a second property, first property buyers usually take up yet another 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 bought. Every electronic appliance and furniture we liked seems “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 an amount that we realized we couldn’t afford having all of them.
We went through the list meticulously to either “downgrade” a TV size, and struck off non essential items to avoid taking up unnecessary loans. Same goes for a renovation loan.
Trap 4) Not Finding The Right Balance Of Cash & CPF Monies For Repayment
You may want to consider paying more with CPF monies and less cash at the early stage of your working life, when more cash is needed to sustain your lifestyle.
However, when the banks are only paying less than 1% interest on your cash savings, compared to 2.5% interest on your CPF funds, the rest is simple math when you know the power of compound interest.
Trap 5) Letting Banks Earn Huge Profits Off You
Your parents and relatives will not charge you interest like the banks. If you can, it’ll be nice to repay them with the same interest amount at the average banks’ savings interest rates.
In short, try to draw up a holistic plan when you are ready to dive in to commit to your own home, be it the first or second or third. Work out the sums and assess your overall financial status in terms of available cash and CPF funds.
Follow the interest rates of the local banks closely and make sure you review regularly, so you can adjust your 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 after my yearly review.
You can thank me when you enjoy the huge savings you could get by just shortening your loan repayment period by 2-3 years over an original 30-year one.
Thank yourself for taking action by avoiding these 5 booby traps, and share this article with your friends who are looking to buy a home!