The big question: how badly are Singaporeans really struggling with their home loan payments?
A few weeks ago, we released a piece examining the financial statements of Singapore’s “Big Three” banks to get a glimpse of the situation. The gist of it was that there were minimal new non-performing loans (loans over 90 days overdue) seen, although the banks have been pre-emptively adding to their buffers, just in case. So, at least for the period up till end-September, things looked okay.
But new reports have emerged predicting potentially greater difficulties on the horizon.
Are Greater Financial Difficulties on the Horizon?
On December 1st, MAS released its 2020 Financial Stability Review. It was a somewhat bleak report, warning of potentially greater financial difficulties for some families ahead. Specifically, MAS’ Household FVI (Financial Vulnerability Index) had “increased significantly” from a year ago.
Further, in its latest Labour Market report, the Ministry of Manpower notes that it expects retrenchments to continue. This is especially for the manufacturing and services sectors, primarily in arts, entertainment & recreation, and air transport segments.
This appears to be confirmed by the recent OCBC Financial Wellness Index 2020, which found that 30% of respondents had trouble paying off their home loans this year, compared to 21% in 2019.
What Does This All Mean for You? (How to Stay Prepared)
Nobody knows exactly what the future holds. The only sensible way forward then is to be as prepared as possible to put yourself in the best position to avoid such difficulties.
With that in mind, here are five quick cash flow tips that could help you weather any economic storm.
Quick Tip #1: Start with an honest and realistic self-assessment
Before you can go anywhere, you must first know where you are. And that means beginning with an honest and realistic picture of both your finances and psychology. The finances part involves studying your past cash flows (both in and out) and estimating your future ones.
Psychology means taking a hard look at your “money habits” and acknowledging your behaviour. If you’ve always had trouble saving – be honest with yourself. It is important you do not deny it, but instead accept it and make a plan to move forward.
Quick Tip #2: Always give yourself a margin of safety when planning
When estimating future expenses, it is wise to always give yourself a margin of safety. This will not only give you psychological peace of mind, but also flexibility to manoeuvre. This is especially important during uncertain times.
For example, if you’re buying a home, why not assume your interest rate is 3.5% instead? If you know you can comfortably afford 3.5%, then you will not be worried when interest rates rise from their current rock-bottom levels.
- Margin of Safety: How Much Should You Buffer When Buying Property?
- Home Loans Amid COVID-19: Will This “Low Interest Rate Environment” Last?
Quick Tip #3: Beware the trap of high-interest debt
Home loans are the cheapest type of loans there is because of their secured and long-term nature. In fact, they’re now so cheap that some savvy homeowners prefer to use cash instead of CPF to service them because of the higher CPF interest rates.
This does not apply to unsecured high-interest debt. If you have a lot of this type of debt outstanding, you should look to reduce it as much and as fast as possible. If you’re in a private property, a home equity loan could be used to consolidate your debt. And of course, once you’ve cut down on it, make sure you avoid falling into the trap again.
Read More: Home Equity Loans (or Cash-Out Refinancing): Should You Use Your Property To Loan More Funds?
Quick Tip #4: Look for “easy wins”
Oftentimes, when we take a closer look at our finances, we find areas that we can easily optimise to improve our cash flow. In other words, easy wins. One common example is your home loan instalments. A simple refinancing or repricing (perhaps even with a tenure extension) could save you hundreds of dollars each month.
- Should You Reprice or Refinance Your Home Loan?
- 4 Things To Know Before You Refinance Your Home Loan
- Home Loan Refinancing: Why is it Important to Conserve Cash Flow?
But what should you do with that extra cash flow? It depends on your personal situation, but the best thing to do is have a system in place.
Quick Tip #5: Put a system in place
Willpower is overrated. Exercising willpower involves making additional difficult daily decisions – on top of all the others we already must make. This can lead to decision fatigue and compromise long-term success. It’s why successful dieting starts with making the right choices at the grocery store, not when you’re at home contemplating which flavour of chips to munch on while watching Netflix.
The same applies for your finances. Let’s say you’ve refinanced your home loan and now have an additional $300 each month. But you also know your spending can sometimes get out of control (especially with year-end deals coming up). A good suggestion is to set up standing instructions to automatically transfer that money into a separate account each month – removing temptation without needing to constantly exercise your limited willpower.
Read More: Home Financing Strategies For Managing Cash Flow Amidst COVID-19 Pandemic
Final Tip: Don’t be Afraid to Ask for Advice
Our financial lives can be intensely personal. And we might even feel shame around our financial habits, especially if they’ve landed us in trouble before. This shame can prevent us from asking for help – even when we know we should.
You shouldn’t let any of that hold you back from the very real benefits you could get by simply asking. If you’re looking for private and personalised advice on anything related to home financing, just fill out this short form – one of our professional Home Finance Advisors will get in touch. And for the best information on everything home financing, check out our Home Financing Guides.
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.