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Before all the marriage-related bliss takes place, every couple has to go through the purchase and financing of their new home, and that has been proven to be an extremely daunting task. New BTOs and resale flats stand at hundreds of thousands of dollars, leaving many stressed about how they will be able to afford such large purchases with the joint income they currently have. Here are some tips and hacks we find extremely useful when considering the financing of homes.
1. Consider using both HDB & Bank loans
There are two important things to look at when deciding where to get your loan from – the first being the amount of down payment needed and the second being the interest rate charged.
|
|
HDB Loans |
Bank Loans |
|
Down payment Required |
10% of value of home (all of which can come from the CPF Ordinary Account) |
20% of the value of the home (5% must be paid in cash, 15% can come from the CPF Ordinary Account) |
|
Interest Rate |
2.6% |
An average of 1% lower than HDB Loans |
With bank loans, 5% of cash paid upfront can be straining for couples, especially if accompanied by existing expenditures such as the upcoming wedding and honeymoon.
Here are the tips:
(i) Take out a HDB loan (2.6% interest rate) and make the 10% down payment from your CPF account.
(ii) The BTO/Resale Flat’s value will gradually decline as you pay off the loan and as the value of your home increases!
(iii) After 3 -5 years (or for more specific details, ask the bank to calculate which point for you), you would have paid off 20% of your loan, and there you can switch from a HDB loan to a bank loan where you are able to enjoy paying off the rest of the loan at the bank’s lowered interest rates.
And there, no cash would be involved.
2. Down Payment Amount for HDB Loans
While it does say that the down payment required is 10% of the value of your home, upon taking up the HDB loan, down payment is actually the larger of either (i) 10% of the value of the home or (ii) the balance in your CPF Ordinary Account.
It is definitely advisable to have at least some sort of balance in the Ordinary Account should your CPF contribution stop. Should you have more than 10% of the value of the home, perhaps you could temporarily reduce the amount of money in the Ordinary Account by purchasing some investment products so that the money is not sucked into the down payment for the new home.
3. Pegged rates vs. Fixed rates in Bank Loans
One more decision comes in when choosing bank loans: pegged rates and fixed rates. Pegged rates are usually cheaper but banks reset them every month, leading to slight fluctuations in rates.
Fixed rates are slightly more expensive, but they are riskier because banks are locked in for 2 years while borrowers are locked in for 3 years – meaning banks have the liberty of raising rates in the final year of the contract. Not to mention, fixed rates are usually pushed by banks because of its higher profitability.
While pegged rates are slightly cheaper than fixed rates, differences are pretty negligible. However, whatever rate you have decided on, try not to switch prematurely or face the early repayment penalty instituted by the banks.
This article was contributed by Erina Tan.
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