Sunday Times: What to look out for when buying property

[Dennis Ng]

On Sunday Times 13 May 2007 page 33 Finance Personal Adviser Column, a reader ask:"Please advise on a checklist of important details to look out for when buying property."

Below is my ful reply, part of which was published by Sunday Times:

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

Purchase of property involves substantial amount of money and can involve long term financial commitment. Thus, the most important thing is to ensure that you can comfortably afford the property you’re purchasing.

Affordability

A general guide is to ensure your total monthly Housing Loan instalment does not exceed 35% of your monthly income. This will help ensure that you have sufficient cash for fulfilling other objectives such as retirement.

As a measure of prudence, it is also good to set aside cash and/or CPF sufficient to pay for at least 6 months of monthly instalment in the event you might stop working for any reason.

Location
Location is also an important consideration. A well-maintained property in a good location would be better able to sustain its valuation compared to one in a not so good location. Of course, location which is convenient to you, for instance, near your work place, can also be an important consideration. By staying near your work place, you can save time and money spent on daily commuting.

Personal Inspection

You should personally inspect the property before buying. Keep an eye on the physical structure to estimate any cost of renovation and repairs that might be necessary. The physical environment is also an important consideration. For instance, a large vacant plot of land next to the subject property may eventually be built up blocking your view and affecting the value of the property.

Remaining lease of property

Please note that for any property with remaining lease of less than 60 years, the maximum CPF withdrawal limit can range from 0% to 100%, much lower than the usual 126%.

Prior Bank Loan Approval
Getting Prior Bank Loan approval before you commit to purchase a property.

You might risk forfeiting your option money in the event that the bank is unable to match your financing requirements. For instance, the purchase price of your property might be higher than bank’s valuation, any excess would have to be paid in cash. You might also need a higher loan amount than what the bank is willing to approve based on your income situation.

Thus, it is advisable for you to first get Prior Bank Loan approval before you commit to purchase a property.

When shopping for the right Housing Loan, keep these tips in mind:

Loan duration:
Check the maximum loan term that you can get. The normal loan term is 30 to 35 years, or up to when you are 65 or 70 years old, whichever is lower. However, if you plan to retire by age 60, you should not take up a Housing Loan that stretches to say, 65 years old instead.

Monthly payment projections:
Compare the monthly repayment (based on different interest rate scenarios) from various Banks to see if you are comfortable with the amount.

Interest rate Comparison:
Check to see if the bank offers fixed rate loans and how long the fixed rate period will be, especially if you anticipate interest rates going up. Please note that Banks typically charges higher interest rates if you want fixed interest rates. Thus, if interest rates are not going up, you might actually be better off choosing a Floating Rate Housing Loan instead.

Extras:
Check to see if the bank gives free fire insurance and other freebies, such as free gifts.

Free Loan Conversion:
if you’re buying properties that are still under construction, you might want to check if the bank offers a one-time free loan conversion when the property reaches TOP as you want the flexibility to switch to a better package rather be stuck with your existing package which might be worse off.

Penalties:
Ask to see what fees will be applied if you do partial or full redemption of your loan. Also check how long is the penalty period. Currently, there are some Housing Loan packages with zero penalty period, while typically most Housing Loans have 1 to 3 years of penalty period.

Other costs
These include legal fees. Banks typically provide legal subsidy pegged to 0.4% of the loan amount. Thus, if your loan is big enough, the bank might help you pay for legal fees fully without you having to pay at all.

Special Promotional packages:
From time to time, banks might come up with special promotional packages. Typically, such special promotions come and go. Thus, if you engage the services of a Mortgage Broker, the broker would be able to provide you updated information on such special promotions.

Banks continue to innovate to come up with different packages to suit different needs. At any point in time, there can easily be more than 100 different packages available. Thus, smart consumers typically would engage the FREE services of a Mortgage Broker to help them sieve through maze of packages to find a Housing Loan package that is most suitable to your needs.