Can we afford a house in Singapore

Do you know that one of the mission statements of the Housing & Development Board (HDB) is to "provide affordable homes of quality and value"? Though public housing in Singapore is anything but cheap, most Singaporeans do indeed manage to have a roof over their heads. This brings us to next question: how much do first time young home buyers need to afford a house in Singapore?

Example 1:

  BTO flats are heavily subsidized by the government, hence they are extremely popular with young couples who have just entered the work force not long ago. In addition, the government also provides various housing subsidies in the form of grants, such as the Additional CPF Housing Grant (AHG) and Special CPF Housing Grant (SHG), to help lower and middle income HDB flats buyers own their first homes. Consider a Singaporean couple who wants to apply for a BTO flat and has an average combined income of under S$ 6,000. They will be entitled to the Special CPF Housing Grant (SHG) where they will receive S$ 10,000 in CPF grants. Do note that SHG is only given to eligible first-timer citizen families who are applying a 2-room to 4-room flat in non-mature estates, like Hougang and Sengkang, and whose average gross monthly household income does not exceed S$ 6,500. After they have successfully balloted for a BTO unit, the next course of action will be to apply for the HDB Loan Eligibility (HLE) letter if they want to obtain a HDB loan, or a letter of Offer from the banks if they prefer a bank loan. HDB will subsequently arrange for an appointment with them to select and book their preferred unit. The couple will have to pay an option fee of S$ 2,000 via NETS during the appointment. This cash amount will be reimbursed to them if there is enough money in their CPF Ordinary Account to pay the downpayment which is 10% of the purchase price of the flat if they are taking a housing loan from HDB. Otherwise, assuming they are eligible for a loan ceiling of 80% from the bank, they will have to pay the initial payment of 5% in cash (the option fee will form part of the cash portion of the downpayment) and the balance of 15% using CPF savings, CPF Housing Grant or cash. Buyers are required to pay the downpayment (plus 1-3% legal and stamp fees) when they sign the sales agreement. Using a monthly salary of S$ 2,500 (of which S$ 575 is being allocated to the CPF Ordinary Account every month) as calculation, the young couple should have at least S$ 22,000 in their CPF Ordinary Account after working for 3 years, including 13th month bonus but excluding company and work performance bonuses. Hence, they should have no difficulty paying the downpayment with their CPF savings regardless using a HDB loan or a bank loan. As this is their first home, they may utilize all the savings in their CPF Ordinary Account to finance the housing loan. After they “empty” their CPF Ordinary Accounts, and not forgetting their SHG of S$ 10,000, the balance loan amount will be around S$ 200,000 instead. Assuming they prefer to take HDB loan and are taking the maximum number of years, which is 25 years to pay back, their monthly loan installment will be estimated to be $908 (calculated from HDB loan calculator). As their combined monthly savings in their CPF Ordinary Accounts is S$ 1,150, it is clear that both of them do not need to fork out any cash as the subsequent contributions by their companies and themselves to their CPF Ordinary Accounts will have more than enough to repay the loan.    

Example 2:

  Though resale units in the open market are selling at a much higher price than BTO flats, it is still possible for young couples to afford one. However, they have to be mentally prepared that the same amount of budget that could get them a 4-room BTO flat, would most likely only fletch them a 3-room resale unit in the open market. Nevertheless, there are perks that come with purchasing a resale unit, such as cutting short the waiting period and getting to stay near your parents. In fact, to encourage young married couples to get a resale HDB flat near their parents, the government is giving first-timer married applicants that bought a resale unit within 2km from their parents’ flat an additional S$ 40,000 CPF Housing Grant. Do note that CPF Housing Grant is only applicable for eligible first-timer citizen households buying a resale flat from the open market. For those who bought a resale unit outside the 2 km range from their parents’ flat, they are still entitled to S$ 30, 000 CPF Housing Grant. Using the Singaporean couple example mentioned in Example 1, supposedly they have decided to get a resale flat in Telok Blangah Rise instead as it is nearer to their parents, what will their revised monthly installment be like? First of all, buyers can only obtain a valuation report after the seller has granted them the Option to Purchase (OTP). In other words, the couple will have to do their homework thoroughly before agreeing to a selling price as the mortgage lender, whether HDB or banks, will only grant loans based on the lower of sales price or valuation. Once an offer is made, an option fee of between S$ 1 – S$ 1,000 as agreed by both buyers and sellers will have to be made to the seller. Assuming the valuation report is higher than the sales price and the couple has decided to go ahead with the purchase, they can exercise their OTP by paying a deposit (not exceed $5,000 in total including the option fee) to the seller. This is to be paid in cash only and will form part of the downpayment. Since the resale unit is near their parents’ place, the couple will receive the S$ 40,000 CPF grant, bringing the amount in their combined CPF Ordinary Accounts to at least S$ 84,000. Assuming the cash deposit is S$ 4,000, the downpayment required will be at least S$ 28,000 (not forgetting the 1-3% stamp duty and legal fee). After using all the remaining savings in their CPF Ordinary Accounts to finance the loan, the balance amount will be around S$ 232,000. Using the HDB loan calculator and assuming a 25 years payback period, their monthly loan installment is estimated to be $1,053. Since the combined monthly savings in their CPF Ordinary Accounts is S$ 1,150, they can comfortably pay off this resale unit with their monthly CPF monies.    

Example 3:

  ECs were introduced to cater to Singaporeans (with average gross monthly household income not exceeding S$ 12,000) who can afford more than an HDB flat but still find private properties out of their reach. As ECs are developed and sold by the private developers, they are considered private properties and therefore HDB loans will not be applicable for this type of housing. Consider another couple who has an average monthly income of S$ 5,5000 each (of which S$ 1,265 is being allocated to the CPF Ordinary Account every month). After working for 3 years, their combined savings in their CPF Ordinary Accounts will be at least S$ 98,670, including 13th month bonus but excluding company and work performance bonuses. As their combined average monthly household income is less than S$ 12,000, they are also eligible to receive S$ 30,000 CPF Housing Grant. Assuming they are eligible for a loan ceiling of 80% from the bank, they will have to pay an initial payment of 5% in cash, which is S$ 38,700, and the balance of 15% using CPF savings, CPF Housing Grant or cash. After adding the stamp duty of S$ 17,820 (3% of sales price minus S$ 5,400) and legal fees of $2,500 (actual amount will vary) to the 15% balance, which is S$ 116,100, the couple will have to pay a total of S$ 136,420. Their combined savings in the CPF Ordinary Accounts is at least S$ 128,670 after we added in the S$ 30,000 CPF Housing Grant, which means besides the 5% option fees in cash, they may still need to top up an additional S$ 7,750 if there is not enough savings in their CPF. In other words, they need to pay at least S$ 46,450 in cash, depending on the actual savings they have in CPF. The interest rate of bank loans varies according to the type of property and the home loan package a borrower takes up. If we assume a 2% interest rate and a 30-year loan period, the couple’s monthly payment will be around S$ 2,300 which they can afford to repay using their combined CPF savings without having to come out with more cash payment. Hence, it is important to buffer in the initial cash component when buying ECs and ensure that it will not put a stain to your finances. As we can see from the examples, owning a house needs not burn a hole in our pocket if we plan it well. Firstly, calculate a comfortable and definite budget to work with as this will help determine the range of property sales prices that suit your budget. Then proceed to narrow down the area and unit of your preferred choice, keeping in mind the budget. If you are tied on cash, BTO flats will be your best choice as you do not pay any cash upfront if you have sufficient savings in your CPF accounts.   Written by PropertyGuru.com.sg Property, HDB, Value