My LARGEST investment yet?!?! (jk clickbait)
Hello!
There's no updates for a really long time because nothing much is really happening.
Why? Because we got a resale flat, and almost every cent has been going off to pay the related costs, so effectively this would be my largest investment - not in the financial sense, but more of our future in general - so far.
This post will largely gloss over the considerations going into it and some financial details to lend further context to these decisions.
So first of all, why resale?
NON FINANCIAL POINTS
1. Time. We failed our BTO balloting twice, and the next upcoming project that we would likely be going for would be expected to be complete in 2026-ish (probably delayed even further by now). That's far too long a wait.
2. Location. We would prefer to be closer to our parents which restricts the area by quite a bit, effectively the only project applicable for BTO would be Tengah, and well, we didn't manage to get it.
Personally, I would also want it to have the following within distance (<8mins or 1km walking distance) :
- MRT
- Food (Hawker center, coffeeshops, etc.)
- Supermarket
- Recreational areas such as parks
Of course, I know that points 2-4 won't be knowable until the BTO is built, but I assume there would be anyway.
3. Grants. Resale flats have much higher grants from the government, on average 70-80k more than BTOs. I shall not go into details how as there's plenty of resources out there already, such as HDB own's website. However, benefits here are largely offset by the obviously higher resale price compared to BTOs, which will be covered in detail later.
4. Size. The 4 room resale flat we got is approximately 102sqm, compared to the BTO equivalent of 90sqm, which is about 13% larger! Additionally, BTOs typically come with a bomb shelter, which is at least a minimum of 4.8sqm in area, considering the thick ass reinforced walls, I would reasonably say it's at least 5sqm, which leaves you with about 85sqm of workable space, almost 15% smaller than a resale unit.
Budget is not really something that drives us to resale as it is not a factor for comparison; both resale and BTO would still effectively be restricted by the same budget.
FINANCIAL POINTS
Here come the financials, it is also something that plays the heaviest factor in my consideration. I know most people place more priority on the above points, but I guess I'm just a finance guy. Could be something you missed too, no harm to take a look.
1. TDSR (or Total Debt Servicing Ratio) and total budget
Estimating very conservatively, here's what we are effectively hard-capped by, assuming a coupled income of 3k/mth each, and expenses of 1k/mth. Note that TDSR applies to both private and public housing, whereas Mortgage Servicing Ratio (MSR) would be different between them. More information here.
With 1.6k available for mortgage monthly, we could effectively loan up to about 350k, based on this calculation, assuming CPF interest rate of 2.6%. If we are going by bank rates of 1.5% (at time of purchase), it would be about 400k.
In addition to our eligible grants of about 100k, our combined CPF amounts of about 50k, and cash of about 20k, our total maximum limit would be about 350k+100k+50k+20k = 520k. Obviously purchasing a home at this price is not going to be a good idea, because there is no buffer to fall back on in case of any additional costs.
Hence, a reasonable amount we would be looking at is around 400k, give or take some.
Note that in event of BTO purchase, the estimated price is around 350-400k (before grants), so it would definitely fall within TDSR & budget.
400k for a resale 4 room is not exactly easy to find, with all the non-financial requirements. There are also resale-specific considerations such as the age of the flat and renovation costs.
2. Fair valuation
In terms of valuation, we also had to do proportion scaling of size, prorating age with the prices for a fair comparison.
Of course, spreadsheets are involved :) (details are irrelevant so you don't have to read the spreadsheet)
Then, it's time for the search. 99.co (not sponsored post btw) has a pretty neat function to draw search areas and apply filters so you can use it to filter for the 4km proximity grant, like this.
Of course, there's plenty of flats which would fall under budget and location. However, things get a little messy when you start looking into the individual age of the houses, floor, size, etc.
For example,
- Same price, but low floor vs high floor
- Same price, but older lease vs newer lease
- Same price, but smaller vs larger sqm
- Etc.
These are all rather subjective in terms of how much premium/discount you are willing to assign to each factor so I won't go too much into my own details here.
3. Type of loan
There's plenty of websites comparing HDB vs bank loans, such as this, this, or this, so it's not the point of discussion here. But ultimately, we went for a bank loan for the following reasons.
- Current low interest rate environment. Fixed-rate of 1.5% for 5 years, versus HDB 2.6%. At a 300k loan, the monthly mortgages would be $1,039.83 (bank) vs $1,179.54 (HDB) respectively. This allows a guaranteed savings of (1179-1039)*12*5 = $8400 in the 5 year period, a pretty sizeable amount.
- HDB loan would require you to empty out your CPF, keeping only a maximum of 20k. Not exactly a fan of that, as we would want CPF buffers in event of income loss. Additionally, lesser CPF used means lesser interest accruals required to be repaid in event that we sell the flat (we don't) and also more money from just compounding the money in it. Another reason for using as little CPF as possible by going for a bank loan is because I would want to loan as much as possible.
This might sound financially risky but at 1.5%, and historically mortgage rates not going higher than 2%, maximizing loans in favour of not touching CPF/cash is preferred because it is easy to beat the loan interest with conservative investment returns, hence more loans = more profits.
A bank loan also requires 5% cash up front, and some might argue that this cash could better be used to generate higher returns in investments. However, assuming I take an HDB loan, there would be an equivalent amount in CPF being used up as well, which would incur a 2.5% opportunity cost and 2.6% interest cost. Comparing a modest investment return of 5-6%, there really isn't much difference here.
Another thing to take note of is the Cash over valuation (COV), which affects your cash outlay off the bat. This is a subjective amount that differs from case to case, in our relatively unfortunate situation, our COV is 20k. You would also need to be mindful of stamp duty and lawyer fees. For our property price of 400k, these two come up to about 10k (can be paid with CPF, if not, then it's cash).
This brings us to a cash required upfront of 20k (5% cash bank loan) + 20k (COV) of 40k. Renovations also would be expected to set us back about 60k, which means we would need 100k cash straight up upon deciding to purchase a resale. That's definitely no small sum, so you might want to consider taking an HDB loan (no 5%), cutting down on renovations, or simply going for BTO instead (no COV for BTOs).
Other random notes and FAQs
- You can rent out your home immediately upon completion, during the first 5 years of the minimum occupancy period (MOP), subject to certain restrictions.
- Based on personal experience and data gathered, average renovation costs for resale, assuming a decent amount of makeover (20yr+ flat), would run about 20k higher than BTOs.
- Our mortgage of 1.1k per month is effectively covered by CPF. An income of 3k would give you 1.1k CPF, of which ~62% ($620) goes into OA (the portion that can be used for the mortgage). Hence $620x2 > $1100, with change left.
- Your housing grants are provided in the form of CPF. Hence you will have to pay accrued interest on them as well if you sell your house. As we don't really plan to do so, we are not particularly concerned about interest accruals.
Do I have plans to upgrade to a condo or buy a second property in Singapore in the future?
Nope.
While there are different ways of accumulating wealth for retirement, one very common method would be to go for a second property + renting it out and/or purchasing a much pricier home such as EC or condos to live in + appreciation.
As opposed to doing so, my plan is to spend as conservatively as possible on the flat and chunking everything into investments. This clearly segregates the home for simply living purposes and retirement assets coming from other sources, mainly investments.
Is investing in stocks or property better?
Idk man, a property agent would probably tell you properties are better, and the same for a stocks person. Go for what suits you.
What if bank interest rates spike up?
I don't think that will happen to a point where it's unmanageable, especially with covid. Following the 2008 global financial crisis till now, even the Fed is unable to hike interest rates past a few %, which is gone again after the pandemic. Even if it does, our loan quantum is relatively little so there's plenty of margin of safety.
That's bout it folks.
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