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Buying a home is an exciting life milestone, but it can also be a nerve-racking process, especially for first-time home buyers. It will probably also be the most expensive purchase you will ever make, so you want to establish a responsible plan for ownership.
If you’re a little unsure about saving for a down payment, here’s how to get started:
1. Start saving early
This might sound like a no-brainer, but the earlier you start saving for a home, the more options you will have down the line. For instance, having more dispensable cash will open up the option of buying a resale flat at a desired location instead of balloting for a new one.
It also allows you the option of putting down a higher down payment. This may put you in the position of being able to make extra payments and pay off your mortgage sooner, thus saving a lot of interest expense. It also protects buyers somewhat from defaulting on mortgage payments if you get laid off or run into some other financial problems. Defaults can be messy and expensive.
Make saving money a habit, and don’t rely too much on your CPF savings – it is meant for your retirement after all.
2. Determine how much you need to save
How much you will need to save for your down payment will depend on your loan amount and percentage of the property value you borrow. This is tied largely to your eligibility and the type of property you intend to purchase. For example, if you are planning to purchase a HDB flat, you can either opt for a HDB housing loan or a bank home loan.
A HDB housing loan allows you to borrow up to 90% of the property’s market value, while a bank loan allow home buyers to borrow up to 80%. Your financial situation will determine which is the better option for your wallet.
For example, if you’re the type who prefers stability, then a HDB housing loan would be the better choice as it has a very stable interest rate that hasn’t changed much in the last few decades. Bank loans are more volatile, but for greater hold on interest, a bank loan would be the better solution as bank loans come with a typical loan rate of between 1.6% – 2%, while a HDB loan comes with an annual rate of 2.6%.
3. Maintain a good credit score
Your credit score can have a huge impact on whether your mortgage application gets approved and at what interest rate. Because lenders often perceive bad credit as a risk, having poor credit often means you will be charged higher interest rates, given a smaller margin of finance, or simply rejected outright.
In general, your monthly debt (including the one you’re about to take), should not exceed 70% of your monthly net income for home loans. Besides your mortgage rates, your credit score can also affect potential applications for credit cards, hire purchase loans and education loans, amongst others.
4. Be financially prepared at all times
When it comes to saving for a future home, most people only consider their down payment. This is a mistake you don’t want to make. In addition to saving specifically for your home, you should still aim for at least six months of living expenses for emergencies such as a serious illness or a sudden job loss.
You don’t want to have nothing in your bank account by the time you get your keys, or do not have the means to fix your home should something break down.
One way to ensure that you’re on the right track is to prepare a budget and stick to it. Avoid spending on non-essential items and impulse purchases, as this type of spending could delay your dream of owning your own home.