Part I of Buy or Rent your Home?

General Finances
By hiveup,

For those of you who have just entered the workforce, as well as those who have been in it for a good 5-10 years, you might be at a stage where you are left wondering, “should I rent or buy my next home?”. It could be a HDB or it could be private property depending on your current financial situation.

In recent times, Singapore’s home rents have been falling and this has really helped the masses save on their financial burden. But, does this make financial sense? I hope this article will help you make a better decision as to whether you should rent or buy a home.

photo made with love by OOWA

 

The average Singaporean makes use of government grants in securing HDB flats, which can really take a load off your financial burden as grants can go up to as high as SGD$80,000 if it is your first time buying one. However, the rental market is another set of considerations if you’re thinking about renting instead to avoid taking on additional liabilities. The cost of renting a one room unit in areas which are not as high in demand, such as Sembawang or Bukit Panjang (mainly because they are not very accessible from town), is around $1,500 per month. When you are in more convenient areas that are central such as Bishan, prices would be much higher.

Advantages Disadvantages
Buy
  • In the event that you own more than one property,  it can be used to earn rental income
  • Access to government grants
  • Earning through property investments
  • Access to tax deductibles
  • Less liquidity cash
  • Fluctuating interest rates (if you take up a variable interest rate loan)
Rent
  • Less financial commitment
  • Flexibility of moving out after a period of time
  • Less maintenance obligations (eg. electrical appliances)
  • No form of return
  • Not customisable (in terms of renovation)
  • Unable to pay with CPF
  • No grants given

 

Pros of Buying

  1. Earning rent

When you purchase a home, if you’re intending to use it for investment purposes, you can rent it out to pay off your mortgage. Many Singaporeans do this in a bid to have a second home without having to worry about the mortgage that comes along with it. In fact, if you are able to rent it out at a monthly rate higher than that of your monthly mortgage payments, you might even be able to earn some extra cash!

  1. Government grants

For people who qualify for HDB grants, this can really ease your financial burden as the government does provide you with a considerable amount of money. For first time applicants, BTOs tend to be much cheaper than houses up for sale in the secondary market. Property prices have the tendency to rise in Singapore so homeowners should be able to sell their HDB for a larger amount of money after the holding period of 5 years if they wish.

You can find out more here if you are looking to get a grant.

  1. Tax deductible

As a homeowner, your loan instalments and property taxes are tax deductibles. On the other hand, people who rent have no access to such deductibles.

 

Cons of buying

  1. Huge financial liability

Many people who are buying HDB flats or houses in general tend to have to take out a loan. No one tends to have that much liquid cash to pay it off in one shot when they are young, and this means that you will more likely than not have to take a bank loan. This adds onto your stress because you need to ensure that you have a steady income stream to pay your monthly mortgage.

  1. Fluctuating interest rates

Regardless of whether you choose to take up a fixed or variable interest rate scheme, you will eventually be subjected to a variable interest rate unless you choose to refinance your home. Most fixed interest rate schemes only provide you with a fixed interest rate for 2-3 years, after which it becomes variable. In periods of economic uncertainty, you may be at a loss if the variable interest rate rises above that of the fixed interest rate.

 

Pros of renting

  1. Flexibility

In today’s age, many people switch jobs within a short time frame in the hope of better prospects. As a result, it would not come as a surprise if someone who lived in Pasir Ris would have to commute to Tuas for work. This can be extremely taxing and an inefficient use of time as transport can take up a substantial amount of time, each and every day. As a renter, you would have the flexibility to look for houses and ability to leave once your lease is up. This is particularly useful if you continuously change jobs every 2 to 3 years.

  1. Less maintenance obligations

As a tenant, you can negotiate terms with your landlord to ensure that you are not liable for certain aspects of maintenance. Examples would be maintenance of the refrigerator, air condition etc. depending on the terms of your contract.

 

Cons of renting

  1. Lack of customization

If you are someone who prefers setting up your living space the way you want, renting might not be a good option for you. Most tenants will not allow renovations to be done to their places unless they agree with your renovation ideas. Furthermore, when you give up your lease, you will have to ensure that you return the house to the owner in its original condition unless you have some form of special agreement with the landlord.

  1. Inability to pay with CPF

One big disadvantage of renting is that you will not be allowed to use your CPF to pay for your rental fees. The problem here is that a large portion of our incomes get thrown into CPF and we will not be able to withdraw any amount from this sum until the age of 55. Therefore, one of the ways you can actually get to access that pool of money is through using it to buy property. Sadly, as a renter you do not get that opportunity. This can be a huge burden especially since a large chunk of your monthly salary already goes into CPF.

  1. No government grants

Government grants can go up to $80,000. This can be a huge help in reducing your loan amount especially for those who have just entered the workforce.

 

Stay tuned to Part II of Rent or Buy,  featuring an interview with Meagan Tan, a Client Advisor at ThirdRock Group.

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