By Peter Lin, moneysmart.sg
Congratulations, you’ve found the one! No, I’m not referring to your future spouse. “The One” in this case could only mean your dream house. After all, it’s going to be the biggest financial commitment of your life. Ever. Most first-time home buyers think that buying a house only depends on how much you earn.
You know, like “The more you earn, the more you can loan, the bigger a house you can afford”? Except, it’s not that straightforward. While your monthly income definitely an important factor, there’s one crucial aspect of getting a home loan that will truly decide if you can afford a house – the downpayment.
Really, it doesn’t matter whether it’s a five storey mansion or a shoebox apartment. Here are 3 reasons why you should definitely pay attention to your downpayment, and how they could affect your chances of buying your dream house.
1. The downpayment needs to be 20% of the purchase price, so make sure you have the money
In general, a home loan can only cover up to 80% of the property’s purchase price. This is actually a good thing, believe it or not! For one thing, having a smaller home loan means paying less each month and maybe even shortening the loan tenure. Secondly, it prevents financial disasters like the crisis of 2008 which started out with the bursting of a housing bubble.
Why? Because at least you’re putting in real money when buying a property! Lastly, and perhaps most importantly, it reduces the competition for a property by weeding out potential buyers who can’t afford the downpayment. This way, by preventing the extra demand, you prevent the inflating of the property price.
However, be careful not to become one of those potential buyers that gets weeded out. Always make sure you have the 20% of the purchase price ready when buying the property. If you’re buying a $600,000 flat for example, you need to have at least $120,000 set aside as a downpayment. But who has $120,000 in cash just lying around? That brings me to point 2.
2. The downpayment can be a combination of cash and CPF, so make sure you have enough of both
Regardless of the kind of property you buy and the type of home loan you take, you usually need to come up with a combination of cash and CPF. One exception to the rule is buying a HDB flat with a HDB loan – if you have sufficient CPF savings in your Ordinary Account, you may not even need to pay a single cent in cash!
However, in general, whether you’re buying a HDB or private property, your downpayment needs to be made up of at least 5% of the purchase price in cash and the remainder in cash or CPF.
What does that mean? For example, if you’re buying a $600,000 flat, your downpayment is $120,000. This means you need to produce at least $30,000 in cash for the downpayment and $90,000 in cash or CPF.
So, if you don’t have that $30,000 in cash and can’t borrow it from family and friends, then it’s a good indicator that this property is beyond your reach. This is definitely not the time to be taking out a personal loan to pay your downpayment!
What if you have the $30,000 in cash? Then you have to make sure that you have the remaining $90,000 in your CPF Ordinary Account. How “easy” is it to get $90,000 in your CPF Ordinary Account? It’ll take about 7 years, assuming you’re earning at least $5,000 a month.
In other words, you need to make sure you have both the cash AND the CPF available. Otherwise, you won’t need to worry about buying the house. Because you can’t.
3. The downpayment isn’t the only upfront payment there is – and the others aren’t refundable
In general, the downpayment is 20% of your purchase price. Without a doubt, it’s the biggest upfront payment there is when buying a property. However, it’s not the only upfront payment involved. There are several other fees and charges. These include option fee, legal fees and stamp duties.
Many of these fees aren’t refundable. For example, the Option to Purchase fee is usually 1% of the purchase price. For a $600,000 property, 1% is $6,000. $6,000 that you will be forfeiting if you can’t come up with the downpayment in time.
So, except in really desperate cases, you should not even be starting the process of buying a property unless you’re definitely sure you can put together enough for the downpayment. This way, you don’t end up forfeiting the option fee or, in the case of buying HDB flats, get penalised for cancelling your application for a flat.