There’s an informative article on buying property in the financial adviser column of today’s Sunday Times. I’ll summarize and add my own bits. (Please also refer to my previous post on investing in property.)
When buying property, these are the basic pointers:
- Buy within your means. This is a no-brainer. A general guideline is that the monthly loan installment should not exceed 40% of your take home pay. If you have other installments to service, you should be even more conservative.
- Inspect the property. Check for defects that you’ll have to spend money to fix. For example, if a window leaks when there’s a heavy downpour, you can think of asking for a discount.
- Consider the land tenure. As mentioned previously, it’s still best to buy a freehold or 999-leasehold properties for long term investment. However, 99-leasehold properties are more affordable and can fetch a higher rental yield, but note that there may be a higher chance of capital depreciation when compared to a freehold property.
- Get in-principle approval from at least one bank. As mentioned in the article, “you might risk forfeiting your option money” if you can’t get a loan approval eventually.
When considering bank mortgages, look out for:
- Maximum loan duration, if you intend to stretch out your loan repayment. Some banks look at your current age. Some look at the youngest age among all the joint applicants. Others could be more conservative. Speaking of joint applicants, do you know that you can invest in private property while living in a HDB flat that is still subject to the 5-year penalty period? If you trust your parents (I’m sure you do), you can ask them to own the private property on paper, and all of you jointly apply for a mortgage loan so that the bank can stretch out the loan based on your age.
- Interest rate. There were complaints recently that banks are not too transparent in terms of their “board rates”. I recall one complainant, as reported in the media, said that his bank had different rates for new customers and existing customers. Existing customers, due to the fact that they can’t easily refinance or switch to another bank, are apparently “bullied”. So take note. Ask on how transparent the bank is with regards to its rates, and check around to see if the bank has a reputation for “bullying” loyal customers.
- Lock-in period. Also called penalty period. The idea is that the bank can ask for a penalty payment if you redeem the loan in part or in full before the lock-in period expires. Check with the bank to be sure.
- Freebies. It’s quite standard for a bank to offer to foot the legal fees and fire insurance. But still, it’s good to make sure. And note that if you redeem the loan before the end of the lock-in period, you may have to reimburse the bank for these payments.
- Free one-time refinancing. This allows you the option of refinancing your loan at a later time when the bank offers more attractive packages (e.g. with lower interest rates).
- Special packages. For example, some banks offer to offset your interest payment with the interest earned in another current or savings account. This is extremely popular with cash rich people. How this works is that you deposit your cash in an account (the cash is still liquid; you can withdraw any amount anytime), and whatever interest earned in this account will be used to offset the interest payment for your mortgage loan. This means that a higher portion of your installment goes to reducing your loan principal, effectively shortening the loan repayment period. At the same time, your cash is not locked in any way. No wonder it’s extremely popular.
So should you buy a property now? The short answer is I don’t know. No one can predict the future. What I can tell you is the following:
- The property market is booming now. Contrarians will advise you against buying a property now. However, some people are saying that certain property segments are still worth looking into, such as those in the sub-urban districts.
- It doesn’t augur well if residents find it hard to afford a roof over their heads. If property prices are so beyond the reach of the man in the street (recall the property super boom in the mid-90s), chances are that the market is heading for a crash. If the current market doesn’t seem too hot to you, then you should consider buying.
- Those who made money now had bought their investment properties a few years back. Again, no one knows if those who buy now will make money in future.
You make the call.