In my previous post, I shared a quick figure.
So how can you do a quick financial planning with this knowledge?
Let’s say you would like to buy a new house, a resale HDB flat. A rough price for a 4-room flat nowadays would be approximately $500,000, depending on location.
For HDB flats, if you are eligible for the HDB concessionary loan, you may loan up to 90% of the purchase price. For bank loans, it’s usually about up to 80% loan.
Assuming you took a bank loan, so you are thinking of taking on a 80% loan. So you will be borrowing $400,000 from the bank. Using the quick figure from my previous post, you can actually do a very quick calculation on your monthly repayment amounts required.
If $100,000 on a 25-year loan tenor at 2% interest rate needed a $400 monthly repayment, then $400,000 will require roughly a $1600 monthly repayment amount. As this is a bank loan, $1600 has to be paid in cash. So if you are sharing the loan as a couple, between the both of you, you may like to discuss in depth, the financial details. If you are looking to buy singlehandly, do consider the financial repayment affordability as it will be more taxing to handle this alone.
How do you determine your financial repayment affordability?
I’m going to introduce a term called ‘Debt Service Ratio (DSR)’ now. A recommended DSR is about 30%-40% of your income. So for example, to comfortably keep your DSR to 40%, your (or both) income should be $4000 per month to service a monthly installment of $1600 per month. If you are earning anything in excess of $4000 per month, it’s better. If you are earning lesser, you may need to adjust a bit.
A small tip. It may not be enough to just look at DSR only. Do your own self check, calculate your monthly expenses such as taxes, insurances, transportation, food, entertainment etc. If at the end of the month, you have enough left to pay off the mortgage loan, great! If not, you may realise being able to keep to a comfortable DSR is one thing, being able to repay the loan is another!
In this way, you will know very quickly if buying a $500,000 property is within your financial means or if there is a need to relook at your property requirements.
