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How to pay for your new home

Buying a new home is an exciting affair, but also one of the most painful expenses you will have to make. For most of us, it is unlikely that we will be able to pay for everything in cash, so this is where loans come into handy (or you might say, even necessary).

Firstly, there’s the home loan that you need to get in order to pay for your house. Next, there are renovations as well, and renovation costs are much higher than what you expected. Even for a new BTO flat, everyone is quoting you within $30,000 and above, while a resale flat can set you back by $80,000 or more, depending on how old the house is and the extent of the repairs needed.

Let’s explore these loans further in detail to help you decide which and what to take.

Should I take HDB or bank loan for my house?

If you are buying a HDB flat and do not own any private property, then you are eligible for a HDB concessionary loan, as long as your monthly household income does not exceed $12,000 (or $18,000 for extended families). This is a benefit that only Singapore citizens can enjoy.

Two main reasons why Singaporeans opt for a HDB loan are:

  1. They pay a lower downpayment of 10%, which can be funded using cash or CPF
  2. You can switch to a bank loan anytime thereafter.

One of the biggest benefits for folks who choose to go with a HDB loan is that it solves immediate liquidity issues. Since you can borrow up to 90% of your purchase price for the house and pay the rest with your CPF, you can even end up not paying any cash at all! This is great especially for young couples who might not have spare cash lying around.

However, the current financing rate of HDB loans are at 2.6%, which is significantly higher than the present interest rates that banks are offering.

If you choose to take a bank loan, note that:

  1. You have to pay a downpayment of 25%, of which at least 5% must be in cash
  2. You cannot switch to a HDB loan afterwards, but you can refinance with other banks later on.

The main benefit of bank loans over a HDB loan at this moment is that bank interest rates are much lower (1.8% to 2.1%), so you can save on the amount of interest you pay. But this option is only available for higher income-earners, or those who have spare cash accumulated from prior years of work.

Do note though, that the main risk with taking a bank loan is that the interest rates are subject to fluctuation, which means there could be a chance of you paying more than 2.6% (HDB’s rate) in the future if the general interest rate environment increases.

If you need to take a home loan, remember to check and see if you can pair it with a high-yield savings account, such as DBS Multiplier or UOB One.

Now that you’ve settled the money for your house, what about your renovation?

Should I take a renovation loan?

Ask any of your friends who have done their renovation, and they will speak of how they have had to pay a substantial amount within a short period of 1 to 3 months for their renovation. By the time your house is complete and ready for handover, you would have paid at least 80% (if not the full sum) of the total renovation amount.

With at least $30,000 for a simple BTO renovation project and $80,000 for a resale flat overhaul, most of us do not have that kind of spare cash lying around.

If that describes you as well, this is where a renovation loan can come in handy.

At 3% to 5%, the interest rate on a renovation loan is lower than a personal loan, and even lower than borrowing from your credit card.

You can choose to repay the loan over 1 to 5 years, and the usual maximum loan amount is 6 times of your monthly salary, or $30,000 (whichever is lower). However, note that you can only use this for your renovations and not towards paying for your furniture.

This includes areas such as:

  • Electrical works and wiring
  • Painting or wallpaper works
  • Plastering of your walls or ceiling
  • Flooring and tiling
  • Carpentry
  • Structural changes

Once your loan is approved, the bank will pay your contractor the approved loan amount directly.

If all this talk about loans is starting to worry you, do not fret! You do not have to complete all your renovation in one sitting – instead, focus on essential areas that require renovation works (eg. tiles, walls, kitchen and toilets) and leave the rest to another time. You can also forgo carpentry and go for furniture options from IKEA or JB instead to save more money.

Don’t forget to use the Finder comparison tool to check which bank is offering the cheapest home loan!

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