KEEP­ING A ROOF OVER YOUR HEAD

Your home may be the most ex­pen­sive pur­chase you’ll ever make. Are you sure you can af­ford a long-term loan, come rain or shine?

Simply Her (Singapore) - - Cover Reads - BY CHERYL LEONG

Pre­pare for fu­ture ex­penses and un­ex­pected events that could af­fect your home loan pay­ments.

Even if you can af­ford your home loan now, you need to take into ac­count un­fore­seen cir­cum­stances and fu­ture ex­penses that can af­fect your abil­ity to make pay­ments. Here are some things to look out for.

Loss of in­come

Just as you would put aside a few months’ worth of liv­ing ex­penses as emer­gency funds in case you lose your job, do the same for your prop­erty, says Al­fred Chia, CEO of Sing­cap­i­tal, a fi­nan­cial ad­vi­sory firm.

“Set aside three to six months of in­stal­ment pay­ments in cash. This is a good short-term so­lu­tion – a buf­fer that lets you con­tinue re­pay­ing your loan while you look for an­other job.”

If you wish to be ex­tra-pru­dent, you can main­tain a year’s worth of in­stal­ment pay­ments in your CPF Or­di­nary Ac­count (OA) too, adds Des­mond Chua, head of Loan Guru (part of the Prop­erty Guru Group), an on­line home mort­gage con­sul­tancy.

Death, crit­i­cal ill­ness or sud­den dis­abil­ity

This is where mort­gage in­sur­ance comes in handy, says Al­fred. “It’s an in­sur­ance plan es­pe­cially de­signed to cover your home loan in the event of death, to­tal and per­ma­nent dis­abil­ity or ter­mi­nal ill­ness.”

If you’re a pri­vate or con­do­minium home­owner, this is a smart choice. Al­fred ad­vises sign­ing up for it as soon as you pur­chase your prop­erty, as the pre­mium will in­crease as you get older. “It’s one of the more af­ford­able kinds of in­sur­ance and gives you peace of mind that you’ll al­ways have a roof over your head.”

HDB home­own­ers are cov­ered un­der the com­pul­sory Home Pro­tec­tion Scheme, where the CPF Board will ac­count for out­stand­ing home loans should you be­come per­ma­nently dis­abled or die be­fore the age of 65.

“If you wish to save up for your kids’ ed­u­ca­tion and still meet your loan re­pay­ments, start an ed­u­ca­tion en­dow­ment plan.”

Your kids’ ed­u­ca­tion costs

If you wish to save for your kids’ ed­u­ca­tion and still meet your loan re­pay­ments, a good way to en­sure this is to start an ed­u­ca­tion en­dow­ment plan – which will guar­an­tee lump sum pay­outs af­ter a spec­i­fied num­ber of years.

Al­fred says: “It’s ad­vis­able to kick this off as early as pos­si­ble, so that by the time your chil­dren are ready to at­tend univer­sity in 15 to 20 years, their ed­u­ca­tion fees will be pro­vided for. And you won’t need to worry about eat­ing into your other funds.”

Fluc­tu­at­ing in­ter­est rates

Hous­ing loans usu­ally have two types of in­ter­est rates: Fixed and vari­able. Most home­own­ers go for fixed rate loans, where the in­ter­est rates are frozen for a spe­cific pe­riod. The rate is usu­ally pegged higher than vari­able rate loans – which means you could end up pay­ing more dur­ing the lockin term when in­ter­est rates re­main low and sta­ble. But this will pro­tect you against fluc­tu­at­ing in­ter­est rates, which could spike this year.

“If world­wide eco­nomic con­di­tions con­tinue to im­prove, we can ex­pect in­ter­est rates to rise too. Based on pre­vi­ous records, our in­ter­est rates have risen up to four or five per cent,” says Al­fred.

Pro­tect your nest egg

You don’t want to have noth­ing left in your CPF for re­tire­ment by the time you’re done re­pay­ing your mort­gage. That’s why there are val­u­a­tion and withdrawal lim­its for CPF re­pay­ments – they en­sure that you don’t over­spend your sav­ings when you fi­nance your loan.

Al­fred says: “When you use your CPF funds to ser­vice a home loan, there are two things to take note of: Val­u­a­tion limit (the price at which you bought the prop­erty) and withdrawal limit (pegged at 120 per cent of the val­u­a­tion limit). When you hit both lim­its in your loan re­pay­ments over time, you can no longer use your CPF to ser­vice fu­ture in­stal­ments.”

Are you count­ing on sell­ing your prop­erty to fund your re­tire­ment? Al­fred ad­vises against this be­cause

“A com­mon pit­fall when you use your CPF OA to buy a home is for­get­ting to set aside money to re­pay the ac­crued in­ter­est.”

you may be re­tir­ing when the prop­erty mar­ket is not buoy­ant enough to give you great re­turns. “If you re­tire when the prop­erty mar­ket hits a slump – like dur­ing the 2003 prop­erty bub­ble – you’d have to wait un­til the mar­ket re­vives, which can take years,” he says. You also need to pre­pare for the pos­si­bil­ity that you won’t be able to sell off your prop­erty and down­grade when you re­tire, be­cause your chil­dren may still need to live with you if they can’t af­ford a place of their own.

A com­mon pit­fall when us­ing the CPF OA to buy a home is for­get­ting to set aside money to re­pay the ac­crued in­ter­est, says Des­mond.

“Ac­crued in­ter­est – com­pounded yearly – is the amount you’d have earned if you hadn’t with­drawn CPF funds to pay for your home. CPF pays us a 2.5 per cent in­ter­est rate an­nu­ally, based on the monthly amount with­drawn for your loan. Upon sell­ing your prop­erty, you’ll need to re­turn the prin­ci­pal plus ac­crued in­ter­est to your OA.”

Re­view your fi­nances reg­u­larly

This is es­sen­tial to stay­ing fi­nan­cially healthy. “If in­ter­est rates fluc­tu­ate or if your spouse stops work­ing, such changes can af­fect your Debt Ser­vic­ing Ra­tio (DSR),” says Al­fred.

Banks look at your DSR to see if you’re earn­ing enough to cover your ex­ist­ing debts, be­fore grant­ing you a loan. But you can also use it as a way to see if you’re in good fi­nan­cial shape.

Here’s how to cal­cu­late your DSR: Di­vide your to­tal monthly fi­nan­cial com­mit­ments – in­clud­ing credit card, car and in­sur­ance in­stal­ments – by your monthly in­come and mul­ti­ply it by 100. If your DSR is be­low 40 per cent, you’re gen­er­ally fi­nan­cially sound; any­thing above that means you need to re­view your fi­nances.

Al­fred ex­plains: “For ex­am­ple, if you’re the sole bread­win­ner, tak­ing home $5,000, a DSR of 40 per cent means you can­not use more than $2,000 for all out­stand­ing loan re­pay­ments. If you’re pay­ing $1,200 for your car and $300 for your credit cards, that leaves you with $500 to sup­port your home loan, which may not be suf­fi­cient.”

Al­fred rec­om­mends re­cal­cu­lat­ing your DSR ev­ery two to three years or when­ever your fi­nan­cial sit­u­a­tion changes, so that you can look at op­tions like repric­ing or re­fi­nanc­ing your home loan if nec­es­sary.

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