Across my articles since the middle of last year, you may have realised that I described the property market as one of increasing low supply and historical highs across the board.
“Will prices continue its upwards trajectory and how high will it increase?”
This question pops up inevitably in two out of three new conversations that I have with family, friends and clients. Regardless whether you’re a buyer or seller, price will be one of your main concerns and the ideal situation would be to sell high and buy low. However, with prices being at what seems like an all-time high, what can we consider as a good bargain? Or should price even be considered as a motivating factor to upgrade? With interest rates set to revert back to the level before the 08 Financial Crisis, many wonder if it is still the right time to take the leap and sell their flat to fund a condo purchase. Yes, this may be your final chance to sell your flat at it’s peak, but is that the best option?
If the thought of upgrading has been lingering in your mind for some time now, ask yourself these 3 questions that revolves around the concept of affordability:
- Would you be paying too much upfront with current interest rates?
- Do you have sufficient savings to tide through a volatile economy?
- Do you require the stability of an HDB loan?
If your answer is ‘No’, ‘Yes’ and ‘No’, you’re most probably in a comfortable position to upgrade. However, let’s dive deeper into each question.
Before we proceed, I just want to take this opportunity to thank each and every one of you for your unwavering support in 2022. This achievement wouldn’t have been possible without the faith and trust you placed in me. For that, I want to extend my sincere gratitude for allowing me to assist you in all your real estate needs. I will continue to strive for excellence in everything I do while remaining transparent and honest in any advice I give. Without further ado, let’s talk about affordability in this month’s article.
Would You be Paying Too Much Upfront With Current Interest Rates?
When determining your TDSR limit of 55%, the interest rate floor used is 4%. This means that a loan of $1 million for 25 years will incur a monthly loan repayment of approximately $5,278 (even if the actual interest rate on your package is lower).
To qualify for this, a minimum monthly income of around $9,596 is required (as repayments cannot exceed 55% of your monthly income, inclusive of other debt obligations).
Suppose you’re now not qualified for such a loan under the new interest rate floor, you’ll have to fork out a larger downpayment which may eat into your cash savings if you do not have sufficient CPF monies in your Ordinary Account (OA).
If you find yourself wiping a large part of your savings that are meant for rainy days, it would not be the best decision to upgrade.
Do You Have Sufficient Savings to Tide Through A Volatile Economy?
If you’re receiving monthly CPF contributions by both yourself and your employee, you can use them for your monthly repayments. However, do note that the accrued interest still applies and you’d have to return the principal sum plus accrued interest into your CPF account upon the sale of your property.
Assuming that your monthly repayments exceed the total CPF contributions, you’d have to top up the shortfall in cash. As unrealistic as some might deem fit, the 3–3–5 rule of prudence can be a guideline to follow. Basically, it means that you should have 30% of the capital required for your new property, monthly loan repayments should be kept at 30% of your monthly income, and the total price should not exceed 5 times your combined annual income. That being said, you still can upgrade if the cash portion for your monthly loan repayments exceeds 30% of your monthly income, you just need to exercise greater prudence in other aspects. After all, no one should be able to make that decision for you except yourself.
Do You Require the Stability of an HDB Loan?
The average home loan interest rate is now climbing past 3%, after over a decade at 2% or below. While it is not entirely impossible for rates to go as high as 4% by the end of the year, the current interest rate environment is certainly not as attractive as it used to be the last decade.
HDB loan which is always pegged at 0.1% above the current CPF interest rate is definitely the most viable source to obtain a loan. However, purchasing an Executive Condominium (EC) or a private property would mean having to take a loan from a bank.
Will I Still Have A Chance To Upgrade in Future if I Don’t Do So Now?
Perhaps, after reviewing the 3 points above, you find that you can upgrade comfortably. However, breaking out of that comfort zone and taking on more commitments to upgrade is something that doesn’t bode well. Or maybe you’d like to wait till you’re in a more comfortable position with less financial commitments before considering the upgrade.
There is absolutely nothing wrong with that.
However, when the supply of HDB flats increases on the back of the ramped-up building in 2020 and 2021, resale flat prices are expected to dip in the future. Coupled with the speed at which private property prices are outpacing resale flat prices, there may be an argument for some to make the jump while they can. That is not to say that HDB prices will not inflate in the future, but chances are, condo prices in the area will be even higher.
If you believe that the growth of the prices of private properties will outpace that of HDB, it could be worth upgrading now if:
- You have an advantage with a longer loan tenure;
- Your cash proceeds won’t be reduced marginally because of accrued interest; &
- You have good job security and progression
Your personal financial situation trumps any speculation on market situations. Always ensure you meet basic levels of prudence and don’t rush into upgrading just because you fear the pace of rising prices. It is much worse to buy what you can’t afford than to just have to save up longer
I hope this article serves purposeful in helping you make a more well-informed decision, regardless of whether you’re purchasing a property for own-stay or investment. As always, feel free to share your opinion in the comment section and I will take time to address them when I can. Till next time!