How large should my housing loan down payment be?

CPCG SG

By: Zeng Han Jun, CPCG, Singapore

The moment you decided to purchase that house of yours, you will have to decide how much of a down payment to pay. Traditionally, most people go for the mainstream 20 – 80 payment, meaning that the payment consists of 20 percent cash or CPF and 80 percent of housing loan. However, there are always people who go for a 10 – 90 or even a 40 – 60 payment structure. How do you decide?

Are you stretched out financially?

If you have substantial amount of debts to service, it is best that you do not pay too large of a down payment. Leave some working cash in your savings or money market account to preserve that needed liquidity. Let’s talk about Chris; He is an Army Officer who has about $250,000 in his savings account. When he bought the new HDB 5 room flat, he was determined to pay down his housing loan as soon as possible in order to be debt free. He then uses all the money in his savings account for that. Unfortunately, his wife got seriously ill and the insurance was unable to cover all the medical expenses. Most of his salary was used to service his car loans, student loan, personal loans and previous credit card loans. He then had to resort to using additional expensive credit cards to tide over the period. He thought of getting an equity loan but he is unable to do it with a HDB flat. He decided to sell off his flat and downgrade to a smaller apartment. Too bad he could not get a buyer fast enough and the interest from the credit cards are starting to hurt him financially. What is the lesson that can be learnt from Chris? Leave yourself some savings for emergency use, because you never know what is going to happen. Making that large payment by wiping out your savings cushion may not be a wise move when you are already highly leveraged in debts.

Are you planning to stay in the house for long?

This is an important factor when you have to determine that down payment. If you are planning to stay in your house for long time, it makes sense to pay more and to be housing loan free as soon as possible. By paying more, you have more equity in your property and certainly is a big step towards full ownership. Psychologically, it clears off the housing loan load off your mind. If you are not planning to stay in the house for long but look upon it as an investment, then it make sense to pay as little as possible. Instead of making a large down payment, free up that cash and invest in instruments that can beat the inflation rate. This strategy requires you to have strong cash flow, and if you are, then opting for a 10 – 90 payment may not be such a bad idea after all. Sophisticated investors might leverage on an interest only mortgage. Interest only mortgage can be structured with or without an expiry period. Talk to your mortgage advisor for more details.

How strong is your salary?

If your personal cash flow is not strong enough to purchase that dream house yet your bank officer recommends a 10 – 90 financing structure for you. Think about it. A 10 – 90 payment structure normally comes with higher interest rates. Let’s just say your salary is really not strong enough, but you decide make a 10% downpayment. After which you are charged with a higher interest rate than the traditional 20 - 80 housing loans. With that comes a higher installment, which means a larger portion of your salary has to be channeled to that housing loan every month. Throw in some unforeseen financial burdens and it could very well be the start of your debt nightmare. Prevent this from happening by talking to your mortgage advisor, and have him or her to advise you. Be careful when your bank officer tries pushing you to take up a housing loan that is beyond your means.

Determining that down payment can be very stressful but by making an informed decision, it certainly saves you a lot of potential problems that might surface in the future. Do not rush into a deal too quickly without considering its implications. Although lenders automatically limit your borrowing capacity, do take note that they are telling you the maximum amount of money you can borrow. Work with your mortgage advisor to determine the safe amount of money to borrow, not the maximum amount.

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