The Hidden Costs of Home Ownership
Looking to invest in a new property now that the real estate market is declining? While it can be a good time to look at buying a new home, it’s crucial that you’ve got all that fits to ensure that you can pay for it.
Other than working out how much you’d need to pay for that new place, do you know that there could be some hidden costs involved that you might overlook? Here’s a look at all the fine prints and costs you’d need to fork out so that you can better prepare for your home financing:
Costs of Purchasing A Property (Private)
After you’ve decided on the place you want to purchase, you’d need to pay to secure the Option to Purchase (OTP) for your dream home. Once the option fee has been paid, the sellers are contractually bound to make the property available to you. The option fee is usually 1% of the agreed purchase price of the property. You can still change your mind but you’d need to forfeit this fee if you want to give up the property.
Option exercise fee
Once you have confirmed that you want to buy the property, you will need to pay 5 to 10% of the agreed purchase price to exercise the option.
The downpayment will form the bulk of the upfront payment for your new property purchase. It is the minimum sum that needs to be paid in cash. For private properties in Singapore, at least 5% of the total sum has to be paid in cash, while the remaining 15% can either be paid in cash or by your CPF money. The other 80% will usually come from your bank loan.
For example: A $1 million property financed with maximum 80% loan quantum ($800,000):
- Option fee 1% = S$10,000
- Option exercise fee 9% = S$90,000
- Down payment = S$200,000 minus $100,000 (total option fees)
- Total downpayment outstanding = S$100,000
Once the Option to Purchase contract is signed, you’d need to pay for the stamp duty which is currently at:
- 1% for the first S$180,000
- 2% for the next S$180,000
- 3% for remainder of either the purchase price or market value, whichever is higher.
If you are a foreigner or have more than 1 property under your name, you’d need to pay the Additional Buyers Stamp Duty.
Stamp Duty for mortgage agreement
The paperwork for securing a standard mortgage will require a payment of 0.4% of the loan amount granted or a maximum duty of $500. This will be paid to the IRAS.
Legal fees are paid to a lawyer for carrying out the necessary background checks on the property plus any transfer of ownership title. This costs around 0.4% of the transaction price, up to $3,000.
A fee paid for a valuation of the home, after which the banks will use the amount to qualify the loan. It can cost between $300 to $500.
We’ve just gone through the necessary costs for the upfront payment of your new home. How about some other costs that you may not have anticipated?
Depending on whether you are buying a condominium that has just TOP, or a place that’s been lived in for a couple of years, you’d need to spend on renovations. If it is a new place and you do not really wish to make much of a difference in its interior design, you can basically move in. However, if it’s a place that’s old, renovations can easily cost from $50,00 to $100,000, so do factor that into the cost of buying your new home.
You’d realise now the reason why home owners are always monitoring interest rates of mortgages. This is because more than half the cost of your home will actually go towards paying the interests on your mortgage loans! Think about how much it can come up to for that 2% on your S$800,000 loan stretched over 30 years. Talk about compound interest! This is why it is extremely important to keep refinancing or repricing your mortgage as an option once you are over your lock-in period. A few percentage points can translate to a lot of lost money!
If you are buying a private property, you’d need to pay a monthly maintenance fee to the management for taking care of the common area around the condominium. The fees can range between $150 to $600, which means that it can come up to a substantial amount over the years. Remember to take these fees into consideration should the time come to buy or sell your home. You’d need to include them as part of the costs of the property as well.
Lastly, don’t forget that for every cent you don’t spend, you can redirect those funds into other interest-yielding assets. Imagine not buying that property and putting the downpayment into something that gives you an annual return of 2%, which is a rather conservative estimate. If you give that $100,000 just 10 years to grow and compound the interest earned, it will translate to a future value of $121,900. A close to $22,000 gain! Of course, who knows, your property purchase can translate to a better capital gain in 10 years as well? It’s a bet, right?
We hope the list above gives you a better idea of the costs and finances that you’d need to consider before jumping right in when the property market is sliding. Consequences would be dire if you do not factor in the total costs involved! Always remember to add in some buffer or emergency funds, you’d never know when you need it!