Budgeting for a Build-To-Order (“BTO”) or Resale Flat– How Much Do You Need?

Conversation between me and a client who bought his HDB flat when the price was at the peak.

Me: Don’t you think the price was high when you bought the flat?

Client:  No, not at all.  All my neighbours were buying at around the same price so I don’t feel that it’s expensive at all. In fact, I was worried that if I don’t buy, the price will continue to go up and I will have to buy an even smaller flat with the same budget.

Me: Do you have any regrets?

Client: I guess it’s too late for that.  All I want now is to make sure I can continue to maintain the monthly instalments.  I can only think about retirement and all the other financial planning stuff when the loan is settled.

It is a big deal buying a property, especially if it’s your first time.  It’s probably one of the biggest financial purchases you will make, you are likely to borrow a big sum of money and you will probably be locked into a commitment to pay it back over 20 or even 30 years(with interest of course).  Most importantly, it is not a decision that can be easily revoked without significant consequences.

Besides it being a major financial decision, it is also quite likely to be an emotional decision.  When you are buying a place to call home, having just walls to keep away the cold or floors to put beds and tables will not be quite enough.  Other considerations such as comfort, convenience, “feel”, proximity to family, facing and many other such factors are just as, if not more important than price and valuation.

The point is that if one is not thoughtful about it or just “leave it to fate”, the opportunity to get it financially wrong can be quite significant.  And when you happen to be the one to get this wrong, trying to undo it is probably one of the worst life experiences you can get.

Financially Speaking…Always Start with a HDB

For most of us, it will be a good idea to purchase a HDB flat as your first property even if you have the financial means to buy a private property.  This is because the first property is usually purchased in your mid 20s or early 30s which is a period of many existing and increasing financial commitments such as giving allowance to parents, repayment of student loans, saving for marriage, starting a family and many others.  Over committing to a property will immediately create stress in all these other areas.

For couples who have registered for a Build To Order (“BTO”) flat early and don’t mind living in a non-mature estate, they have the advantage of paying a lower price and having years to save before they get the keys to their flats.  Others may simply opt for a resale HDB flat because they are likely to be larger in size, often located in a more convenient location with good accessibility, and allows the couple to move in within a short period of time.

Financial Budgeting Before House Hunting

Whether you choose to buy a BTO or a resale HDB flat, you should start the house hunting process with a budget.  Working from a budget not only protects you from over-stretching your finances, it can actually help you to negotiate better deals when you know exactly what your bottom line is.  This is where financial planning is required to help work a suitable budget that has been “stress tested”.

The process can be broken into three stages or the 3 “Bs” – Book, Borrow and Buy.  Understanding these 3 steps will help you to work out the fourth “B” – Budget.

The Three “B”s of Budgeting (Book, Borrow, Buy)

1. Book

This is the first step towards reserving the right to go ahead and purchase the property.  During this first step, there will be a requirement of a small cash outlay for the following:

  1. Option to Purchase – Usually $1,000 but in some cases, negotiable.
  2. Deposit to Buyer – Negotiable
  3. Cash Over Valuation (if necessary) – Negotiated at this point and will have to be paid in cash later.

The purpose of making the booking is to secure an exclusive period for you to do your due diligence and secure loan financing (if required) to be able to go ahead with the purchase and this brings me to the next stage…

2. Borrow (skip if mortgage loan is not required)

Some people borrow money to buy a property because they cannot afford to pay for it all at one go.  Others borrow money to buy a property because they want to use the financial leverage available to them.  Whatever the reason, setting up the loan requires financial budgeting depending on the maximum loan amount available and the loan amount you are willing to commit to.

Generally, you will have to set an amount known as the “down payment” which is usually at least 10% or 20% of the purchase value of the property. Unless rules change in the future where you can borrow without the need to down pay, this will probably be the major item you have to budget for.

Assuming you are able to secure a loan from a financial institution and have the down payment ready, you can go ahead and complete the purchase.

3. Buy

This is the final stage of the process to get the purchase “over the line”.  As the amounts may not be as significant as the down payment, they are often not planned for.  However, without this stage, the purchase cannot be completed and more importantly, the items do add up and it may end up being a significant five figure sum.

  1. Buyer Stamp Duty – Tax you will have to pay for the purchase.
  2. Legal Fees
  3. Miscellaneous Expenses such as administrative fees…etc

Other Items to Budget For (Potential Blind Spots)

Renovations

Purchasing a resale HDB flat may require more renovation as compared to a BTO flat, but whichever type of property you purchase, this is an inevitable item to plan and budget for. Some couples may spend a six-figure sum for renovations alone, which is not advisable if budget is tight. As a guide, you can consider budgeting renovations at 10% of the purchase price of the home.

Using $500,000 as an example, you should keep your renovation costs under $50,000. Do take note that most people tend to exceed their planned budget for renovations, so give yourself a little buffer in planning for this.

Furnishing and Home Contents

So you’ve got your renovations done up, but you must not forget about your budget for your home furnishing! The good thing about home furnishing is that you can spread out the commitments by buying the extra stuff along the way after you have moved in or “credit-card instalment” them.

Nevertheless, you will still need to be working on a budget for financial discipline so here is a reasonable example of the cost of having some of the basic furnishing before you can start living in your new home:

 

Where does financial planning fit in?

As a financial planner, I am probably a little biased in believing that people should go through a financial review before they start the house hunting process rather than to house hunt first, and then figure where to find the finances to purchase the house.

When it comes to the financial review, these are the 3 main areas to focus on to be able to arrive at a sensible and sound budget:

  1. Saving – How much do you need to save from now on to be able to pay for the initial costs involved with little or no borrowings?
  2. Borrowing – What is the right amount to borrow without overstretching your monthly cash flow?
  3. Stress Testing – Are you able to withstand financially the worst case scenarios such as rapidly rising interest rates, a loss of job or a prolonged economic recession?

Start by working out your Budget here!

For those intending to purchase a resale HDB, you can start by using this Guide to Budgeting for a BTO/HDB Resale Flat  which includes an example as well as a worksheet to help you get a sense of how much it will really take to buy that dream home of yours.  Most importantly, it will ensure you enter the process of negotiation with your financial eyes wide open.

(NOTE: Get our Guide to Budgeting for a BTO/HDB Resale Flat to provide you with an example as well as a worksheet to help you do a budgeting exercise before you begin your house hunting journey. Get your checklist Here)

Good luck and have fun finding your home, sweet home!

Article by Andrea Loh

Email: andrea.loh@proinvest.com.sg

<strong>Andrea Loh</strong>
Andrea LohFinancial Services Manager

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