Here’s the reality. Property is most probably the largest purchase a person will ever make. And most Singaporeans will likely end up with a home loan at some point in their lives, whether jointly or individually. This means doing things the right way – and avoiding the common pitfalls – is crucial. As the saying goes, prevention is better than cure.
5 Common Mistakes When Getting a Home Loan
With that in mind, here are five types of home loan mistakes you could fall into – and what you can do to avoid them.
1. Not Getting Your Internal “House” in Order First
Before buying a physical house, you need to get your metaphorical house in order first. We’re of course talking about your finances, which includes your cash balances, CPF funds, other debt, and your monthly cash flows.
Because this is a broad category, there are many different forms such mistakes this could take. A few to ponder:
- You don’t get your credit score in order beforehand. As a result, you get your home loan application rejected or approved with a lower LTV ratio.
- You don’t save up enough cash for your downpayment and have to rely almost entirely on your CPF funds. Perhaps even without realising it, you miss out on tens of thousands of dollars in CPF interest.
- You have high-interest consumer debt which you don’t clear off first. TDSR rules now mean you get a lower LTV on your home loan.
Avoiding this mistake is simple, but not easy. It might mean accepting some harsh truths about your present financial state. But it’s better to deal with those now, before you have the added obligation of a home loan.
2. Obsessing Over the “Wrong” Thing
Because home loans are a major financial obligation, people are naturally motivated to look for ways to lower their costs. While understandable, this can lead to misplaced focus which can actually harm them. They want the lowest upfront interest rates, the lowest possible downpayment, and the longest possible tenure.
Now, all these are not necessarily “wrong”. The point here is that they should not be automatically considered “right”. For instance:
- The lowest upfront interest rates may only be the lowest for the first three years. From the fourth year onwards, they may be readjusted to a rate higher than what you could find elsewhere on the market. They may also have restrictive lock-in clauses.
- Opting for the lowest possible downpayment usually means drawing the most from your CPF. And the more you draw from your CPF, the higher your opportunity costs in foregone interest income.
- The longer your tenure, the higher the interest you will end up paying over the lifetime of the loan. This may be worth the lower monthly payments – or it may not. There are valid reasons to go for shorter home loan tenures.
Again, we would like to stress that these aren’t necessarily wrong. The mistake here is focusing on the lowest possible initial costs without considering all the other aspects.
3. Not Understanding What You Can Really Afford
Some may choose to deny it. But the property you live in is – and will likely always be – a type of status symbol. Because of this, there is a real risk of people going in over their heads and buying more property than they can afford.
The result? Ending up “house poor” – where your monthly cash flows are so stretched that you have less to spend and invest. This also makes you more financially vulnerable. Remember, that although you may be able to service your home loans on paper (which is why the bank approved it in the first place), the lifestyle you may have to lead to do so may not be one you want.
There are three things you can do to avoid this mistake. The first is to be realistic about what you can or cannot afford. Our Mortgage Affordability Calculator can help with that. The second is to make a habit of building in a margin of safety when assessing your home loan options. Don’t forget the hidden costs of homeownership such as property taxes and maintenance.
The third is a little more philosophical. Do a little introspection, and ask yourself this question – why do I really want this particular property? How much of it is for my family’s comfort, and how much of it is to impress others?
4. Not Considering How Your Needs and Wants Will Change in the Long Term
If you asked most people if they have changed significantly as a person over the past five or 10 years, they would likely say yes. Yet, if you asked them whether they think they will be a different person five or 10 years from now, they would likely say they no – that they would be the same person.
This is supported by research. It even has a name – the end-of-history illusion. It could lead to things like buying a bigger property because your high-paying corporate job (which you don’t really like) can support the monthly payments. Then, years down the line you get sick of it and want to switch to a lower-paying but more fulfilling career. Except now you are trapped by the home loan commitments, forcing you to incur the time and effort of selling and moving to a smaller home.
There are some near-future life changes that you may be able to anticipate, like knowing that your children will be moving out soon and hence choosing a smaller, more affordable condo as opposed to a large landed property. However, when it comes to more unexpected situations like the above, it’s hard to plan ahead.
The solution? Give yourself the financial flexibility to make changes down the road, such as by increasing the margin of safety available.
5. Not Doing Your Due Diligence
Lao Tzu said, “rushing into action, you fail”. This may not apply to everything, but it definitely applies to a major long-term commitment like home loans. When you rush through the home loan process, you can make mistakes like not getting an Approval-in Principle first. This could lead to you forfeiting the Option to Purchase fee and having lower negotiation leverage (and thus worse deals).
Sometimes we miss important steps in our rush to get our home loans settled. Other times, it’s because we got lazy and took a trusted friend’s recommendation at face value.
We are social creatures, meaning we are unavoidably influenced by our peers. The mistake comes when we automatically trust the advice of friends, family, and colleagues without first asking ourselves one important question – is this person qualified to give me advice on this topic?
Yes, they may be well-meaning. But they could also be misinformed. Both things can be true. Further, remember that just because something worked out for them and their own unique circumstances doesn’t mean it automatically translates to yours. So, the next time you hear someone tell you that XXX property is “sure to appreciate” or that XXX mortgage is the “best housing loan”, think twice and do your own independent research.
Which brings us to our next question: where then can you go for objective, independent, and personalised advice for your property-related questions?
PropertyGuru Finance, At Your Service
If you need guidance, all you have to do is fill out a short form, and one of our professional Home Finance Advisors will give you a call. You can walk them through your unique situation, and they will give you objective advice tailored specifically to your needs. This single phone call could potentially prevent you from making most home loan mistakes – you have nothing to lose.
PropertyGuru Finance is partnered with all major banks in Singapore, so you can be sure that all recommendations are 100% unbiased and tailored to your needs.
If you’re not at that stage yet, look through our frequently updated Home Financing guides for everything you need to know on the topic.
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.