In my many years of serving Singapore home buyers, there are 3 common mistakes that many make when looking for their new home. And they are
a. I should complete the sale of my old house and purchase of my new house back to back.
b.If I buy a cheap property, I can sell for massive profit later.
c. I can only get bank financing using my income.
While these seem logical, why are they mistakes? let's explore..
1. Timing the completion of sale and purchase back to back
This mistake has cost home buyers big financial losses.
Buyers usually plan their timings such that once they get the keys to their new home, they can start to move out of their old place.
However, what’s often overlooked is the time taken for the money from the sale of their old property to pay for the new one.
While the cash from the sale proceeds may be able to be deposited into their bank accounts within the same day, their CPF monies need more than 1 to 2 days to process between that sale and purchase. In fact it can take weeks. Therefore, there are home owners who are forced to delay their purchase completion dates due to lack of CPF, and so lost money paying the penalties due to the delay.
2. Buy cheap, So can sell high later.
Let’s look at the story of Maureen and Darren to illustrate this point.
Back in 2014, Maureen and Darren were looking for a home near Commonwealth MRT station, and were comparing 2 condos with the similar accessibility to food, the supermarket and transport
However 1 condo, Commonwealth Towers, was selling around $1600 per square foot or PSF, while the other, Queens, was selling at around $1300 psf.
Darren, believing that if he buys a cheap property, he can sell for more profit in the future, bought the unit at Queens. Maureen on the other hand bought Commonwealth Towers at the higher price.
4 years later, both parties wanted to sell their property for gains. Maureen managed to sell her property around $1900 psf, making $300psf gains. Darren however, didn’t managed to sell as his property did not make any gains at all after 4 years.
So this goes to show, that buying cheap does not necessarily mean the property will get the most gains later. Even within the same location, there are other factors to consider if one wants to get the most profit from his property.
3. Bank Financing from Income Only
Many private home buyers think that to get a mortgage loan for their property, they need to have a good income. However that is only one way.
What many buyers don’t realise is that if they have excess cash after paying the downpayment, it is possible to use that cash to get a loan.
How?
One way is termed Pledging. Simply put, the banks can finance your property purchase based on a fixed deposit amount put with the bank for 4 years. Give an example, say you have additional $250,000 cash after paying the downpayment on the property, and you are eligible to borrow up to 30 years on a mortgage loan, then it is possible that the banks can lend up to $600,000 based on that fixed deposit.
(Each bank’s calculations can differ. Please consult your banker before making any purchase)
Another method is to Unpledge, or what the lay man call Show Funds. What this means is that if you can show the banks that you have money in your savings account, and the bank can lend you based on that amount. What’s interesting about this method is that there is no restriction on how you use those same funds after the mortgage loan is disbursed. For example using the same $250,000 scenario earlier, if you can show this amount in your bank account, the banks can lend you up to $196,000.
(Each bank’s calculations can differ. Please consult your banker before making any purchase)
Now, you can take a mortgage loan that is determined by your income, pledging and unpledging together. What is beneficial of pledging and unpledging, is that the banks can give you a mortgage loan above your TDSR limits.
Therefore in order to avoid these mistakes, it is vital to engage a good advisor to assist you in the planning process before making a purchase.
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