For some strange reason, we are seeing a property bull run in Singapore. This is despite that we are still in recession and the global economy is still not out of the woods yet. A Straits Times article entitled “Cash upfront for HDB resale flats doubles in a month” dated 20 August 2009, it was reported hat the cash needed upfront for a HDB resale roughly doubled last month. PropNex reported the median Cash-Over-Valuation (COV) for 5-room HDB resale as $5,834 in July compared -$796 in April-June period. ERA reported median COV $13,000 for July compared to $5,000 in April-June period. C&H Realty reported median COV $8,000 compared with $3,000 in April-June period. Should you join the property craze? Here are some financial planning tips on property purchase:
* Before you go on your property hunting, do you budget sum first. Do not look for the property and then your budget. This is the incorrect way.
* To do your budget, you need to determine (in the following order) (1) the monthly cash outflow that you can afford for the mortgage installment, (2) the length of the loan installment and (3) the estimated percentage of the property valuation which the lender is willing to lend you. These figures will determine the property price range you can afford to look at.
* Do not waste time visiting showrooms and viewings if the range is not within your budget. Not only a time waster but you are inviting yourself into temptation to purchase a property beyond your means.
* The Cash-Over-Valuation or COV has started to climb for HDB resale flat. This amount cannot be covered under mortgage and has to be paid in cash. Ensure you do not get carried away paying for this COV because you could end up being asset rich but cash poor. You could have a high positive net worth but a cash flow problem could force your property to be foreclosed.
* You must ensure you have sufficient emergency cash in the case you lose your job. For stable job like civil servant, six months emergency cash should be sufficient; private sector job, at least 1 year of emergency cash; for self employed person or a large proportion of pay is in commissions, at least 2 years of emergency cash. If you are self employed, your working capital cannot be considered your emergency cash. CPF Special Account cannot be used for emergency purpose. CPF Medisave can only be used for limited purpose. If you are completely not insured or uninsurable, an emergency cash of at least 5 years may be required for a single (assuming a recovery from sickness within 5 years); at least 20 years of emergency cash required for parents with small children (assuming dependents require 20 years to be financially independent from parents).
* When viewing your property, do not pressure to purchase one. Make sure you are fully satisfied with the property and price before you proceed. Both the buyer and seller’s property agents have vested interest to close the deal because they earn no commission until the deal is closed. Be fully aware of “sales talk” even from your own agent.
* You may like to bring along another person like your relative, friend, colleague, sibling or child who can give you an independent opinion on whether the property is worth the price asking for.
In my experience dealing with clients, I have found property purchase is often clients’ worst form of purchase. This is primarily due to no consideration done in budgeting. I found that often when a large commitment is made to the mortgage, they become “slave” to it. For example, if previously the husband & wife couple had wanted the wife to become a stay-at-home-mum because they wanted quality care for their growing up children, they have to abandon this aspiration because of insufficient cash flow for a single income family. So they end up outsourcing to a maid or childcare while the two persons work. Another aspiration that has to be delay is the postponement of their family planning. The couple could find themselves unable to afford to have children or more children just because they have made an over commitment to the property.
Do not over commit to the property. Life is more than a large brick and mortar. You do not know what you are missing if you become a slave to your property.
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