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Buying your first home can come with huge expectations. Some homeowners see their property as an investment, while others try to max out their CPF savings on the purchase of their first flat. According to financial experts though, these are the things a potential first-homeowner should avoid.
Here are three things you should know when planning for your first property purchase:
1)Know that paying more for your home can make it harder for you to retire
A recent report showed that the more you pay for your home, the more likely you are going to find it harder to be retirement-ready, since all your money is going to be channelled into the downpayment and home loan repayments.
The fact that people often drain their CPF savings when they buy property is also troubling, since most Singaporeans are actually reliant on their CPF funds for retirement.
So when selecting a home, be aware that opting for a cheaper property, such as by going for a 3-room flat when you can well afford a 4- or 5-room one, might actually increase your retirement comfort later in life.
2) Don’t assume housing is an investment that will pay off
Singaporeans tend to think of their homes as a big investment, which is why they’re willing to sacrifice so much to afford them.
This attitude dates back to the previous decades, when the pioneer generation rode on the country’s rapid development and saw the value of their homes rise tremendously over the years. As recently as ten years ago, some Singaporeans were still making hundreds of thousands of dollars flipping their properties.
Those days are over. In this decade, the government stepped in with a series of property cooling measures, from the TDSR rules making it harder for buyers to overstretch themselves to the dreaded ABSD. Even if some of these cooling measures are lifted (which, by the way, doesn’t seem likely to happen in the near future), the days of stratospheric appreciation are over.
That’s not to say property won’t appreciate, but it’s important to get a better understanding of just how much you can expect it to. At the same time, making sure you save money where you can, especially when it comes to the interest you are paying on your home loan, can play a significant part in how much you eventually make. Knowing when you need to refinance your home loan is critical to making sure you aren’t overpaying for your home.
3) Don’t put all of your eggs into one basket
You might complain that Singaporeans are forced to invest in order to be able to retire, and you wouldn’t be wrong, unless you’re the type of person who can put away $1 million in cash.
But if you look at it from a glass-is-half-full perspective, those who make the right investment decisions are richly rewarded. We have no capital gains tax in Singapore, which means that every cent you earn from your investments on, say, the stock market, is yours to keep. In France, people pay 34.5% on their investment gains, while in Australia your investment gains are treated as part of your income and taxed accordingly.
Even if you cling stubbornly to the notion that property remains a great investment vehicle, there is no investment vehicle that is infallible. If your home is your only investment, you’re putting all your eggs into one basket.
That also means that if for some reason the property market is in a slump when you’re ready to retire, we hope you like working at McDonald’s. Even if you’re willing to rent out rooms in your home for the income, your situation might not allow it—you might have family members who aren’t open to the idea, unmarried children who can’t afford to leave or even grandchildren and in-laws coming to live with you.
So make sure you have enough to set aside and invest in other ways even as you buy your first home. If you can’t afford to do both at the same time, that probably means the property you’re thinking of is out of your budget.
If you like this story, be sure to check out other useful financial tips here:
Article by Joanne Poh
The post Before dropping your cash on your first home, here are 3 mistakes not to make appeared first on the MoneySmart blog at http://blog.moneysmart.sg/property/dropping-cash-first-home-make-sure-youre-not-making-3-mistakes/.
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