By: Dennis Ng

Dennis Ng, the writer is a Certified Financial Planner with 15 years of experience in Bank lending. He co-founded an independent Mortgage Consultancy Portalwww.HousingLoanSG.com in year 2003.

Website: www.HousingLoanSG.com  

These are not the best of times, but the Housing Board’s new and resale markets are still holding strong. Last week, in its balloting exercise, the HDB drew an overwhelming response for some of its priciest flats at the 50-storey Pinnacle@Duxton in Tanjong Pagar (Singapore). There were almost 1,500 applications for the 428 four- and five-room flats on offer, or 3.5 hopefuls for every unit. The 111 five-room flats there start at $545,000 and hit $645,800 for a 49th-storey unit - the most expensive new HDB flats - yet there were still 372 applicants.

We wonder how many of them are young married couples. Assume a young couple’s combined income is $8,000, which is the HDB’s ceiling for new flat applicants, and they plan to take out a $500,000 loan stretched over 30 years. If they are eligible for an HDB loan whose interest is 2.6 per cent, their monthly instalment is about $2,000. And they can use $1,600 from their CPF. It is painless.

But what they do not reckon with is that at the end of the 30-year period, they would have paid a total sum of about $800,000 because of the interest, and there will be nothing left in their CPF, except the minimum sum.

Such couples will be asset-rich, cash-poor, which is the position many Singaporeans are in today. Of course, they can imagine their pay and property prices going up over the years. But as the current financial crisis shows, bad times can come unexpectedly, and there is always the possibility of losing one’s job. There are also other young couples who commit themselves to condos and cars before they have built up adequate savings. In a downturn, they will not be able to offload them without suffering losses.

To these young couples, we advise prudence. Property in Singapore is a good long-term investment, probably one of the best. But the wisest thing to do is to start small. Buy a three- or four-room HDB flat in a location that does not come with a huge premium. Then scale up as savings accumulate.

How to be prudent and buy houses within your means?

One way is to ensure that your debt-servicing ratio does not exceed 35%.  Debt servicing ratio basically means how much in percentage terms are you using your income to pay for monthly debt repayments.

Thus, if your Monthly household income is S$6,000, maximum you should pay in Housing Loan instalments (assuming you have NO other debt) is 35% x $6,000 or = S$2,100 per month.

Assuming you take a Housing Loan for 25 years at an average interest rate of 4%, in order not to exceed paying S$2,100 in Housing Loan instalments per month, maximum Price you can pay for a house is S$500,000.

Thus, if you want to commit to buy a S$1 million house, your monthly household income should be at least S$12,000.

Buying a house is a long term financial commitment. It pays to be prudent in order to ensure your house is a "Home Sweet Home" and NOT a "Home Sweat Home", i.e. you have to sweat (worry) every month about paying the Housing Loan instalment.

Happy House Hunting!

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