An Essential Guide To Buying Your First Property

As the global economy creeps out of the financial meltdown which started in 2007 (Sub Prime), people will soon forget the painful lesson learnt. It will be a matter of 1-2 years that people will start spurging and go on years of spending without too much reflection of the painful recession.

This year, since second quarter (2009), as the recession dust starts to settle, the property bubble starts forming right till September. Property sales seems to have started slowing down in October and November. This can be a sign that the property market has overheated and is now cooling off.

This is time where the average buyers are looking at buying their first property.

Property purchase is usually the biggest ticket item in our life. As such, there are things that buyers need to take into consideration.

What is the best way for an individual to gauge if they can afford to buy a property?
It is important to do financial planning. The banks use a bench mark of 40% to 50% Debt Servicing Ratio (DSR). This means, there should not be more than 40% - 50% of the combined income, being commited to financial outlays.

For example, if the combined gross income is $5,000, the maximum financial commitment should not be more than $2,500 per month. Financial commitment includes home loan, car loan, credit card debt, etc.

Financial planning includes being conservative in the outlook. Would be property buyers should not take potential future income in their calculation as this will cause a large proble when income falls.

What are some important factors in securing a bank loan?
Largely, a lender are concern of the ability of a borrower to repay the loan. As such, good financial rating and being free from litigation helps ease banks concern.

Few common reasons why loan application are rejected, is usually due to bad credit history or outstanding litigation which could affect a person's financial standing. Other reasons could be due to inconsistency of income (frequent change of job).


What is the consideration on loan tenure?
Many people believes that they should pay off their loans within the shortest time. That is not totally wrong but not suitable for all senarios.

Shorter loan tenure means lesser interest paid. Loans repayment usually takes principle divided by duration. A simple calculation as follows (taking a small loan size for calculation).
- Loan Principle : $300,000
- Loan Tenure : 20 years
- Monthly principle repayment : $1,250/mth (being, $300k / 20yrs / 12mths)
- Monthly interest assuming at 2.5% : $625/mth (being, $300k x 2.5% /12mths)
- Total monthly repayment : $1,875/mth
- Principle / Interest Ratio : 66.67% / 33.33%

If the tenure is stretched to 30 years:
- Monthly principle repayment : $833.33 (being, $300k / 30yrs / 12mths)
- Monthly interest assuming at 2.5% : $625/mth
- Total monthly repayment : $1,458.33
- Principle / Interest ratio : 57.14% / 42.86%

It is not advisible to reduce the loan tenure for everyone. It is important to work back on to the DSR as well as, checking how much is available from CPF funds to be used towards repaying the monthly installment.

For those intending to reduce tenure using cash every month, there is a need to reconsider if these money can be put to better use, investment and getting better returns. A conservative investment can give a returns of 4-7%pa while home loan interest rates are currently hovering around 2-3%.

CPF Maximum Withdrawal Limit
This is another factor wew must pay close attention to. For those who bought their property on 1 Jan 2008 onwards, they are only able to use up to 120% Valuation Limit. This means, if the valuation is $500,000, the maximum withdrawal limit will be $600,000.

The maximum withdrawal limit includes, downpayment, legal and stamp fee, monthly installment (principle and interest), till it reaches 120%.

For a 30 years loan tenure, the borrower will reach the limit sometime on the 23 year. The remaining 7 odd years will involve full cash.

Take an average young couple for illustration. Assuming, the couple have their first child 2 years after marriage (and owning their property) and second child another 2 years later. If the maximum withdrawal limit is reached on the 23th year, the first child would be about 21 years old while second child is about 19 years old.

At 21 years old, the child may be receiving his/her tetiary education while the second child is reaching tetiary education soon. Cash would be very important then.

Types of Loan Package
Loan packages works around five main loan types as follows:
- Fixed Rate package
- Variable Rate package
- Combo package
- Current Link Account
- SIBOR Rate package

A mortgage bank officer or mortgage consultant will be able to advise further on that.

It is important to look at the economy direction, financial planning, property holding, etc, before deciding on what is a suitable package. The decision will eventually be for the borrower to make.

Other important information for borrowers
1. Mortgage Insurance and Fire Insurance

Mortgage insurance protects the co-borrower in the event one borrower is rendered invalid (death or permenant disability). The insurance will take care of the outstanding loan that they are insured for.

Fire insurance provided by the banks are insufficient. It convers mainly, structure and fittings, with minimal coverage. It is important to also take care of 3rd party liability, which an additional fire insurance can take care of. Such insurance policy cost as little as $150 per year.

2. Refinance
Refinancing upon the lapse of a Lock-in period helps keep the loan interest rate current. Refering back to the Principle/Interest calculation, a lower interest means more repayment towards Principle.


Lastly
It is important to seek the help of a Mortgage Consultant or Financial Planner to help you assess where you stand, how much loan you can secure, before proceeding on your purchase.