Should you get a home loan?
According to the Monetary Authority of Singapore, in 2016, over S$25 million worth of new housing loans were granted. Taking a housing loan in Singapore is quite common. You have several options when it comes to paying and purchasing your own home. You can pay by cash, use your Central Provident Fund, credit card or pay using a housing loan. Cash may not be an option available to you because you don’t have sufficient savings. Purchasing a home using a credit card may put you in debt with an unaffordable interest rate. Besides that, it’s prudent to not dip into your Central Provident Fund just yet; you rather save the money for a rainy day.
This leaves you with the option of taking a housing loan. To buy a house with a loan, there are many requirements you must pass, and you also put yourself at some financial risk when taking the home loan. It’s understable that you are asking yourself whether you should take a home loan, or not.
This is not an easy decision to make. There is no right or wrong decision. You have the challenge of deciding what’s best for your position. However, this article will provide you with the information to help you make the best decision possible.
Why should you buy a house with a loan?
Rising Market Price
Morgan Stanley has stated that home prices in 2018 will rise by 8% and by 2030, the property prices will double. With the market price frequently rising, even if you wait for 5 to 10 years to save money and buy a home, you can expect the housing price to jump up significantly. By taking a home loan and purchasing the home now, you pre-empt the housing price increase.
Own a Home Now
Few have over S$200,000 sitting in their bank account. Hence, going out and immediately paying for a house with cash is not a viable option. You can get a home loan within 2 – 3 weeks and have the ownership of a home now, rather than 10 years later.
Why should not you buy a house with a loan?
Pay more than the market price
A home loan comes with an interest rate of 1 to 3%. The average home in Singapore can cost between S$200,000 and S$300,000. In case, you take a housing loan of S$300,000 with an interest rate of 1.59% and a repayment period of 30 years – the annual principal payment is S$12,576. After 30 years, the total repayment amounts to S$377,412. In essence, you pay S$77,412 in excess of the home’s current market price.
The above example is an optimistic estimation of a home loan. If the market climate is right and your financial situation is good, you will get an interest rate of 1.59%; if not, your home loan will have a higher interest rate.
Take on a large Debt
You take on a significant amount of debt. Such a large amount of debt will take you 20 to 30 years to repay. Paying the debt will considerably eat into your disposal income.
Furthermore, defaulting on the payment, regardless of the reason, can have serious consequences for you.
- Affects your credit score and your financial health
- The house can be repossessed
- Your other assets can be at risk
To put things into perspective, 40% of under 30 Singaporeans default on credit card payment.
Make the Decision
With the above points in mind – how do you make a decision? Should you buy a house with a loan?
Probably the biggest factor to make the decision is your financial stability. Taking on a debt of S$200,000 – S$300,000 requires you to consistently make payments without fail. Financial stability does not refer to holding down the same job for the next 30 years. So, what does financial stability refer to?
- You have the necessary skills to regularly earn sufficient money to make the payments.
- You have income stored away for situations beyond your control, such as an economic downturn that leaves you unemployed.
- Conducted financial planning for the future, which includes yourself, your partner and any children.
If you are financially stable, then you will be able to afford the debt.
Interest Rate vs Current Market Price
The market price of a property will always increase in the future. You need to calculate the interest amount owed and compare it with an estimated market price in the future. If the interest amount is too high in that comparison, you either need to find a home loan with a better interest rate or find a home with a lower market price.
Pick the Right Home Loan
Singapore has many types when it comes to choosing a home loan.
- Home loan from commercial banks
- HDB Loan
- Home Equity Loan
- Bridging loan
- Home Loan Refinancing
You can pick the type of home loan based on your financial situation, whether you have already have a loan, etc.
You can also choose a prefered interest rate system:
- Fixed interest rate
- SIBOR-pegged interest rates (It’s the rate which Singapore Interbank Offered Rate lends to other banks)
- SOR-pegged interest rates (It’s the rate that’s dependent on the exchange rate of Singapore and US dollars)
- Board or deposit-linked interest rates
- Hybrid interest
Each interest rate type offers risks and rewards – which you must decide on.
Taking a housing loan to buy a house should not be an easy decision. It is vital that you read up, speak to multiple experts and make a decision yourself. In case, you do pick a home loan, it is crucial that you pick the best one for your financial situation. This will require a lot of shopping with various institutions to ensure that you get the best deal.
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