Buying property and budget calculation

More and more people are spending more than what they can afford on their home (especially the 1st one) without realising what kind of trouble they are getting themselves into.

So the question is, how do I know if I can afford the property? How much budget do I have?

Let's rack our brains and do some mathematics.

First of all, you must have the answer to these questions:

Q1) How much are you and your spouse contributing to your CPF OA account monthly (employee's contribution only)?

Q2) How much do you and your spouse have in the OA account currently?

With the answers to the 2 questions, you may now calculate your budget. A practical budget that has no impact on your lifestyle at all.

Case study on Andy and Betty who earn $4000 each, combined household income of $8000:

A1) $800 each. Total of $1600 (Consider employee's contribution only)

A2) $50,000 each. Total of $100,000.

I would recommend one to USE up to 90% for home loan repayment.

With contribution of $800 to the CPF OA account monthly in this case study, Andy and Betty should contribute $700 each to repay the home loan monthly.

I would recommend one to KEEP at least 12 months of monthly repayment amount in the OA account as a safety net. Just in case of non-employment.

With $50,000 in each CPF OA account and a monthly repayment of $700.00 in this case study, Andy and Betty should KEEP at least $8,400 in the CPF OA account as safety net. That means they have $83,200 as deposit/down payment/initial payment.

Assuming interest rate of 2% per annum and loan tenure of 10 years, the maximum loan amount that Andy and Betty should get is $152,000. And the budget of the property is $235,200 ($152,000 + $83,200).

Assuming interest rate of 2% per annum and loan tenure of 20 years, the maximum loan amount that Andy and Betty should get is $276,000. And the budget of the property is $359,200 ($276,000 + $83,200). 

Assuming interest rate of 2% per annum and loan tenure of 30 years, the maximum loan amount that Andy and Betty should get is $378,000. And the budget of the property is $461,200 ($378,000 + $83,200).

The above is of course just a case study and one should calculate based on his/her own scenario.

Using the strategy above, you will realise that you do not have to fork out cash for monthly repayment. Hence your liefestyle will not be affected. Moreover, your OA account will be increasing as well due to interests, contribution from employer, contribution from bonus and potentially increased contribution from increased income!

Once you have enough in your CPF, do redeem your home loan and be debt free!




NOTE: DO NOT to take future expected earnings to calculate your budget. You may expect your earnings to increase by how many % in how many years or you may expect promotions within how many years etc. But these are subject to changes which may be affected by uncertainties that no one can predict. No one can predict the futureand you will never know what can happen the next day.

It is always better to be cautious when budgeting. 



Tags: Buying property, calculating budget, CPF, OA account, maximum loan tenure