There are two approaches you can take when buying a home.
The first is to dive in without a second thought. Go and ballot for a BTO flat before you’re even sure you really want to get married, and apply for the biggest flat you think you can afford while you’re at it.
The second approach involves only committing to a home purchase after taking careful stock of your financial situation, using a mortgage calculator to figure how much you need to pay each month and not committing to a property you can barely afford.
Of course, everyone wants to think they fall under the second category. But no matter how well-prepared you think you are, don’t forget about these three things when using that mortgage calculator.
1. Interest rates fluctuate
When you use a mortgage calculator, you work out how much you will need to pay each month based on how much you’re borrowing from the bank, for how long you’re borrowing it and how much interest you’ll be paying.
But don’t forget that you won’t be paying the same interest rates forever. If you are on a floating rate home loan, your interest rate will be pegged to the SIBOR or SOR. And you might be interested in the fact that the SIBOR and SOR have been on the rise, and are likely to continue to rise.
And even if you are on a fixed rate home loan, don’t forget that for most loans your interest rates will only stay the same for the duration of the lock-in period.
The mortgage calculator tells you how much you will be paying each month only at the current interest rates. So don’t forget to give yourself a bit of leeway when working out whether you can afford the home loan repayments—know that you could end up paying more than what the calculator shows you.
2. The bank cannot lend you more than the TDSR rules allow
So you’ve used a mortgage calculator, and you like what you see. The monthly repayment is something you think you can handle.
Well, just because you think you’re able to take on a certain loan quantum doesn’t mean the bank will give it to you. You need to ensure that the bank is allowed to loan you that amount when the TDSR (Total Debt Servicing Ratio) rules are taken into account.
In a nutshell, the TDSR rules dictate that your total loan repayments must not add up to more than 60% of your income. Your total loan repayments include home loan, car loan, personal loan and student loan repayments, as well as credit card debt.
This means that the more indebted you are at the time you apply for your home loan, the lower the amount the bank will be able to lend you. So you’d better use this TDSR calculator to figure out not only how much you think you can afford, but how much the bank is actually allowed to lend you.
So what happens if you discover that you can’t borrow as much money as you need? Well, you could pay off some of your other loans so as to be able to borrow a larger amount for your property purchase.
If that’s not an option, you can either lower your budget and opt for a cheaper property, or increase your loan tenure so you take a longer time to repay it.
3. Your budget and income may change over time
Mortgage calculators are very useful tools, but they only give you a snapshot of one moment in time. Don’t forget to take into account changes in your budget and income in future.
For instance, if you are buying a home with your partner and intend to have kids, consider the fact that one of you might want to drop out of the workforce for a while to look after the child, which would affect your combined income.
You’ll also want to consider the possibility of a career change or sabbatical that might have an impact on your income and ability to repay your loans.
If you intend to repay your home loan using your CPF funds, don’t forget that you don’t get automatic CPF contributions should you stop working or decide to start a business.
So don’t be so quick to commit to purchasing the most expensive property you can afford. You might be able to handle the loan repayments now, but you’re also pretty much chained to your mortgage if you don’t give yourself some wiggle room. If you need a little more consultation on your home loan before deciding, you can always head over to MoneySmart’s Home Loan page. Their Mortgage Specialists will be able to provide you with advice (for free) that is suited to your own needs.
What else should Singaporeans consider when trying to figure out how much they can afford to spend on a home? Tell us in the comments!