10 October 2007

Plan Before You Buy

I was reading the 10 Oct issue of my paper (Wo bao) where my paper reporter Christine Li conducted an exclusive interview with National Development Minister Mah Bow Tan with regards to residential properties, mainly HDB.

(tried to find the article in the internet so that you can read in full details but couldn't...the closest i got to was this)

The reporter posted 6 questions to the Minister. The first question was this (if you trust my translation skills),

"Will public housing (HDB flats) become very expensive? Are the younger people be able to afford them?"

The Minister's response was,

"In the latest sale of Coral Spring, a 4 room flat cost between $188,000 and $252,000. Taking $250,000 as reference, assuming the buyer paid 10% deposit, the remaining 90% (i.e. $225,000) on a concessionary loan rate of 2.6% interest with HDB for 30 years, the monthly installment will be $900 which can be paid using CPF Ordinary Account (OA). In general, the OA is 23% of monthly income. If a couple has a total household income of $4000, their OA should have $920 a month. Thus, there is no need to fork up any additional cash to furnish the loan. As to the initial $25,000, the couple's OA would be enough if they worked for about 2 years.... ...they do not need to fork out additional cash... ...70% of HDB applicants do not need to fork out additional cash..."

There are 5 other questions that talk about the $8,000 limit, not enough HDB flats, smaller HDB flats and competition with private residential developers.

I just want to focus on the first question here. Should anyone jump to the conclusion that they are ready to purchase a HDB flat base on the scenario given by the Minister...don't. Please spare a few moment to consider a bit more. The scenario provided by the Minister is not flawed... as long as everything turns out smoothly as planned.

Consider the following, assuming you and your spouse are earning a total of $4,000 since 2 years ago. You would not have any problems purchasing a $250,000 flat, right? At least, you don't have to pay the 10% deposit (or do you call it downpayment?) with cash since your OA should have enough.

Ask yourself this - will you (both) continue to draw the same pay, no more, no less, for the next 30 years? Assuming the answer is yes...how much will you have to meet the CPF minimum sum? Most likely your pay may change over 30 years and more likely it will increase..but what if it doesn't? Or suay suay one of you loose the job and remained unemployed for months or even years? Can anyone guarantee the worse case scenario will not happen?

Ask yourself also this, what if the concessionary loan rate changes, say downwards? Everyone happy :) but what if it changes upwards? Do you have enough savings/cash to top it up? Can anyone guarantee the worse case scenario will not happpen?

Finally ask yourself this - what if the 23% contribution to OA changes...downwards? Do you think when such a case happens you will be able to take the difference in cash? How do you cope with your loan now? Can anyone guarantee the worse case scenario will not happpen?

And the final bit of his answer...70% do not need to fork out additional cash. Are all of them able to meet the minimum sum later? What about the remaining 30%? Did they commit to a huge loan, lost their job or suffered pay cut later such that they need to top up with cash? Perhaps they wanted to have more in their CPF OA to meet the minimum sum?

My point is THINK - Don't take everything on face value. PLAN ahead, such that you won't need to suffer later.

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