A guide to financing your first home


The Monetary Authority of Singapore (MAS) has warned Singapore households to carefully assess their ability to meet mortgage obligations, as households have amassed a larger pile of debt than they had before Covid-19 struck. So, what do homeowners need to know about financing their home?

On Powering Your Property on Prime Time, Rachel Kelly and Shezad Haque spoke to Sumit Agarwal, Low Tuck Kwong Distinguished Professor of Finance, Economics and Real Estate, National University of Singapore to find out more.

Rachel Kelly: For buyers looking to purchase their first home, what questions should they be asking themselves when it comes to financing?

Sumit Agarwal:

#1: What is the interest rate that needs to be paid for the debt?

#2: What is the right amount of housing?

Most of us tend to consume too much housing. For example, I only need a two-bedroom apartment, but I look for a three-bedroom apartment instead as I think that [the extra room] could be used for my future needs. However, I simply cannot afford it right now as the debt servicing on that might be too much.

#3: Do I have enough cash flow for the next 15 years to pay for the house and is the mortgage at a fixed or adjustable rate?

In Singapore, it is hard to find a completely fixed rate but at the very least the fixed rate would be applicable for the first three years.

Shezad Haque: What else should buyers factor in when it comes to cost and considerations?

Sumit: If we are talking about a buyer’s stamp duty and legal fees, which are all fixed costs, it would be possible to use one’s Central Provident Fund (CPF). But if we were to look at variable costs, which may include your monthly payment, I would advise you to avoid touching your CPF if possible. Instead, try to pay from your current income until you eventually buy the right house.

The biggest problem I have seen is having a lack of understanding when it comes to financing, and getting a loan from one of the private banks rather than from the Housing and Development Board (HDB).

HDB’s interest rates can be slightly high at times when the market’s interest rates are very low. But in the future, we can expect the [bank] interest rates to go up, and the HDB’s interest rates will eventually be lower than what the market has to offer.

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Shezad: What are the pros and cons of leaving your CPF untouched for the mortgage?

Sumit: If you leave your CPF untouched, you are essentially creating a nest egg for retirement - which a lot of people may not have. But there are also constraints that people face when they need housing and some might not have an alternative besides dipping into their CPF. However, if you dip into your CPF, you will have to return that money and pay interest on the amount that was withdrawn, which is around 2.6per cent. So, it can be expensive for some.

Rachel: Are we then paying double interest - interest on our CPF and also on the mortgage?

Sumit: Yes, in some sense. What the CPF [board] is saying is that they would have given you interest for your CPF, but you took it out. You then invested it somewhere else – in housing – and were able to build wealth upon it.

When you sell that house, you have to return the money back to the CPF [board]. Essentially the capital gains – that you would have made from the house – would then be used to pay the interest that you owed upon selling the house.

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Rachel: With interest rates expected to rise, how would this impact the property buying plans for next year? What should homeowners do to plan?

Sumit: With all that is happening with Covid-19, people are beginning to realise that the concept of work-life balance will change [and is changing]. More people are looking towards having an extra room for their workspace and due to this increased need of buying bigger housing, house prices have been going up as a result.

Shezad: What is the ideal percentage of a monthly salary that should be allocated for paying the mortgage?

Sumit: Typically, it would be around 30 to 40 per cent [of your income], because that would still leave you with enough money for other expenses that you might have for the duration of the month.

Listen anywhere and enjoy more features on Awedio: SPH's free digital audio streaming service, to discover the ideal time for buying or renting one's first property — amidst high prices — and more.

This article was first published in MONEY FM 89.3.