Purchasing a property: What is your affordability?

Embarking on a house hunt without a defined budget is comparable to embarking on a journey without a destination in mind. It risks wasting time and energy exploring properties beyond your means.

To avoid this scenario, it's advisable to invest time in gathering estimates and establishing a practical budget before immersing yourself in your home search.

This entails evaluating your financial situation, considering aspects such as income, existing financial obligations, and additional monetary responsibilities.

A clear budget empowers you to navigate the home-buying journey confidently, ensuring you select a property that fits within your financial capabilities. Here are some essential factors to ponder:

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What is within your budget?

Acquiring a home marks a significant milestone and entails a prolonged financial obligation. Ensure your purchase aligns with your long-term financial stability. Sufficient resources are required to cover initial expenses, ongoing homeownership costs, and monthly loan payments.

Initial expenses

• Option fee: Fee paid to secure the right to purchase a property.

• Downpayment: Upfront payment made at the start of the purchase process.

• Stamp duty: Tax levied on legal documents, including property transactions.

• Legal fees: Charges incurred for legal services related to property transactions.

• Agent commissions: Compensation paid to real estate agents for their services.

• Renovation expenses: Costs associated with improving or modifying the property.

Monthly Loan Payments

• Monthly loan payments typically involve repaying a home loan through regular installments. These installments typically comprise both a principal repayment and an interest payment.

• The amount of each monthly installment is determined by factors such as the borrowed amount, loan duration, interest rate, and method of interest calculation.

Continuous Expenditure

• Monthly expenses: Regular payments required for property taxes, fire and mortgage insurance, as well as conservancy and management service fees, which cannot be covered by CPF savings.

• Future interest rate hikes: Potential increases in interest rates for floating rate loans, which may require additional funds.

• Possible drop in property value: Risk of a decrease in property value, potentially resulting in exceeding the original Loan-to-Value (LTV) ratio and necessitating the use of personal savings if unprepared.

What is the maximum amount you can borrow?

HDB and Banks will evaluate your borrowing capacity for a home loan using the following criteria:

1. Mortgage Servicing Ratio (MSR): MSR measures the portion of your gross monthly income allocated to mortgage repayment. MSR = Monthly mortgage repayment / Gross monthly income Your HDB or Executive Condominium (EC) loan installment must not exceed 30% of your gross monthly income, applicable to HDB flats or ECs within the minimum occupation period.

2. Total Debt Servicing Ratio (TDSR): TDSR indicates the percentage of your gross monthly income used for all debt repayments. TDSR = Total monthly debt payments / Gross monthly income Your total monthly debt commitments, including mortgage, car, and credit card payments, should not surpass the TDSR threshold of 55%.

3. Loan-to-Value (LTV) Limits: LTV limit determines the maximum amount available for a housing loan relative to the property value. LTV = Loan amount / Property value Lenders consider various factors before granting LTV, such as existing loans, tenure, monthly repayment as a percentage of income, and any discounts or benefits. For bank loans on residential properties, LTV limits differ based on the number of outstanding housing loans:

Acquiring an HDB Loan

When purchasing an HDB flat, you could be eligible for financing through the HDB. Under an HDB loan arrangement, you have the potential to secure up to 85% of either the property's valuation or purchase price, whichever is less, contingent upon the HDB's credit evaluation. The sum granted by the HDB loan hinges on factors such as the

• purchaser's age

• monthly income

• financial status.

Determining Your Eligibility

To ascertain your eligibility for an HDB loan and the highest sum you can borrow, it is necessary to submit an application for an HDB Loan Eligibility (HLE) letter.

This letter aids in organizing your home acquisition process by furnishing details on the borrowing limit, monthly repayments, required cash amount, and additional terms and conditions.

Please be mindful that qualifying for an HDB loan involves meeting specific criteria, including an income ceiling.

Comparing HDB and Bank Loans

When deciding between an HDB loan and a bank loan to finance your HDB flat, it's essential to weigh the key distinctions, such as the downpayment, interest rate, and the option to settle your loan ahead of schedule.

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Conclusion

In conclusion, establishing a clear budget is paramount before embarking on the journey of purchasing a property. Without a defined budget, the house-hunting process risks becoming aimless and inefficient, potentially leading to frustration and wasted resources. By investing time in gathering estimates and evaluating financial circumstances, prospective buyers can gain a realistic understanding of their affordability and make informed decisions during their home search.

Considering various factors such as initial expenses, ongoing monthly payments, and potential borrowing limits ensures a comprehensive assessment of financial capabilities. Furthermore, understanding the criteria used by HDB and lenders to determine borrowing capacity provides clarity on the maximum amount available for a housing loan.

Ultimately, whether opting for an HDB loan or a bank loan, buyers must carefully consider the terms and conditions, including downpayment requirements, interest rates, and flexibility in loan repayment. By taking a holistic approach to property affordability, individuals can navigate the complex landscape of home ownership with confidence and financial prudence