A Mortgage Is Likely To Be The Biggest Loan You Take In Life. Here’s Why Many Singaporeans End Up Overpaying For It, And What You Can Do Instead

This article was written in collaboration with PropertyGuru. All views expressed are the independent opinion of DollarsAndSense.sg

When it comes to financial management, most people (even financially savvy folks) are understandably worried of being in debt. However, taking a loan may sometimes be unavoidable. For example, we may need to take a loan for our university education.

Similarly, when it comes to buying a property in Singapore, most homeowners tend to require a mortgage.

With homeownership in Singapore at more than 90%, and homes in Singapore costing at least a few hundred thousand dollars or more, it’s fair to say that a mortgage is likely to be the biggest loan that most people in Singapore would take during their lifetime.

Given the high homeownership rates and large sums of money involved, one may also think that most Singapore property owners would be savvy or actively work towards becoming more knowledgeable about taking a mortgage. This is not the case, as a recent PropertyGuru’s Consumer Sentiment Study H1 2020 found that only about 18% of respondents were confident of the process of taking a loan, with 2 in 5 Singaporeans unaware that they can even refinance their home loan to save money.

How Much More Are We Potentially Paying For Our Homes?

Most of us think of the cost of a property as the negotiated price at the point of purchase. For example, if I sell you a condominium for $1 million today, I will receive $1 million and that’s how much you are paying

However, there are many other areas of costs involved that we are either aware of but do not factor in or may not fully appreciate. How much a property actually costs you, the buyer, is a function of 1) downpayment, 2) buyer stamp duty (BSD), 3) legal fees and other administrative fees and 4) total monthly mortgage payments made.

If we buy a $1 million condominium today, our BSD will be $24,600 (assuming it’s our first property and we are Singaporeans). Legal fees and other administrative fees usually amount to upward of $3,000. If we pay the full purchase price of $1 million upfront, this means that our property purchase will cost us $1,027,600.

Source: Stamp Duty Calculator, PropertyGuru

However, if we choose to pay the minimum downpayment only, we need to fork out $250,000 (25% of the purchase price of the property) and take a home loan for the remaining $750,000. Of course, our home loan will come with an additional interest cost.

According to PropertyGuru, home loan interest rates in Singapore (as of 27 March 2020) can be as low as 1.22%. Do note this is due to the current low-interest rate environment, and we should not expect this to continue indefinitely.

Source: Home Loan Rates, PropertyGuru

When deciding on a home loan, we can also choose a tenure that is suitable for us. If we choose a tenure of 25 years, the monthly repayment will be $2,902, or a total of $870,600 over 25 years.

In total, our “$1 million” property will cost us $1,148,200.

The Interest You Pay Today Is Not Going To Remain The Same

Similar to our mobile phone plans, mortgages typically have a lock-in period. In exchange for this lock-in period (usually two or three years), we enjoy promotional interest rates. After the lock-in period is over, rates typically increase. This applies for both fixed and floating rate packages that we take.

After our lock-in period, we are eligible to refinance our mortgage with another bank or to reprice it with our existing bank. In most cases, refinancing or repricing will help us to save money on our mortgage. This is similar to how many people would switch or recontract mobile plans whenever their 24-month contract is up to save money or receive other perks.

How Much Can You Save When You Refinance?

Assuming the interest rate that you currently have at 1.22% goes up to 3.0% after the 2-year lock-in period. With the new interest rate, your mortgage repayment each month will increase from $2,902 to $3,556, or $654 more each month.

If you choose to refinance, you can potentially save on a chunk of this additional monthly increase.

Why Then Do People Not Choose To Refinance?

The simple answer. Lack of awareness and possibly, inconvenience.

Unlike getting a new handphone plan where it’s easy to do research, discuss with your friends and take a queue number to ask the service staff more questions just to save a few dollars each month, getting a housing loan requires a lot more effort, especially if you do not have anyone guiding you.

A home loan is also typically not the first thing people think about when starting their property search. Instead, most people will start by looking for their dream home first.

After they have shortlisted and are on the verge of making an offer, the question will then pop up on whether or not they can afford to make the downpayment required and receive the loan needed to complete the transaction.

With this, the steps when it comes to searching for a property is typically like this.

1) Search for a dream home.

2) Find a home we like. Negotiate and agree on the price.

3) Apply for a home loan. Take the interest rates offered by a bank who approves our loan.

But perhaps, a more rational sequence when it comes to finding a property should be like this instead.

1) Know how much we can afford based on how much we can borrow, and the interest rates we will be paying.

2) Search for homes that fit our budget.

3) Find a home we like. Negotiate and agree on the price.

When we are at the stage of negotiating on the purchase price with the seller, we should already have certainty over what we can afford, and the interest rates that we will be paying if the transaction takes place. Home financing and affordability should be the first thing on our mind when we start the search for a property, not an afterthought.

Let PropertyGuru Finance Help You Find The Dream Home (That You Can Afford)

To help property owners in Singapore better understand what they can afford, PropertyGuru has an affordability calculator, which has been designed especially for residential property purchases in Singapore to allow property owners to understand what they can afford.

For example, based on a 30-year-old couple, both earning $5,000 each month and buying their first property , and with a combined cash savings of $50,000, and another $50,000 in their CPF Ordinary Account, we know that they will be able to afford a property purchase of up to $400,000.

Source: Affordability Calculator, Property Guru

To gauge the affordability of a home, the PropertyGuru affordability calculator takes into consideration factors such as your salary, the Loan-to-Value (LTV) ratio, the Mortgage Servicing Ratio (For HDB flats) and more. It also considers other existing debts you may already have since this will also limit how much you are able to borrow.

Of course, the journey doesn’t (and shouldn’t) just end by knowing what you can afford. As the market leader in the property listing space, PropertyGuru is well-positioned to help match you to properties in Singapore that are within your budget.

And if you need help in understanding which home loan is right for you before you begin your property search, you can also make an appointment with a PropertyGuru Home Finance Adviser for a free consultation.

Through these additional services provided via PropertyGuru Finance, PropertyGuru is hoping to not only help homeowners find their dream home but also to make sure that they can comfortably afford it.