Most people dream of owning a home one day. The process of saving up and getting loans can be daunting. It may seem like you’ll never be able to afford a house or flat. But by following a few simple steps you’ll be ready before you know it! This week we’re covering the ins and outs of buying a property.
Saving for a house or flat is about more than just a down payment. In fact, down payments in Singapore are as low as 10%. Of course you should still save for your down payment, but you can certainly use your CPF in Singapore. Unfortunately in Hong Kong your MPF can only go towards retirement.
But you should really be focused on saving up for everything else that comes with home ownership; a mortgage, utilities, maintenance, and insurance. As a good rule of thumb, you should have about six months of these expenses saved up before purchasing a home.
If you’re serious about saving up for a house you need to cut down on unnecessary spending. This means your wants. Put your weekly girls night on hold, skip your annual holiday, and stop eating out. Little things like this can add up fast and help you reach your goal. You may want to consider pausing your retirement savings and diverting the money towards your home savings.
Put Away Every Extra Penny
When you end up with a budget surplus, put the money into your house savings fund. When you pay in cash and end up with change, put it in your house savings fund. When your birthday or other holiday comes up, ask for money for your house savings fund.
Buying a house almost always means taking out a loan. A mortgage is a legal document that lays out the terms and payment obligations of the loan. There are many different kinds of home loans. The type you end up with will be dependent on your preference and financial situation.
Your borrowing capacity and interest rate will largely depend on your current income, debt, and credit history. To increase the amount you can borrow and decrease your interest rate you should focus on managing your debt and improving your credit.
In Singapore, home loans are contingent on the Total Debt Servicing Ratio (TDSR) limit. Under the TDSR framework your debt cannot exceed 60% of your income. This means all of your debts: car loans, student loans, credit card debt, personal loans, and of course, home loans. So managing your other debt will greatly increase your borrowing capacity.
The framework is similar in Hong Kong. The TDSR is calculated by dividing mortgage payments, property tax, and other debts by your income. Individual banks decide an acceptable TDSR, which is usually between 40-60%. Hong Kong also uses a Loan-To-Value (LTV) ratio to determine the size of your loan. It is typically 60-80% on the purchase price.
Your credit score will also be taken into account when purchasing a home. Even if you have enough money to repay a loan, the lender can deny you. Having a bad credit score or credit report can really hurt your chances or result in high interest rates. A good credit score can help you get better interest rates.
In general, payment defaults will go away 5 years after you’ve settled the account. So make sure you are paying bills in full and on time! Check your credit report routinely to rectify any issues. You can boost your credit score by taking out small loans with low interest rates and paying them back fast. And always keep your credit card balances low!