Planning for Your First Property – Part 2
In the previous article, we examined the 4 main pillars of buying your first property:
1. Mortgage
2. Renovation
3. Furniture and appliances
4. Property tax and insurance
Having covered mortgage and renovation already, we now delve into the remaining two pillars. Following a brief description of furniture and appliances, we then discuss the various financing methods available and provide our take on which method is best. Finally, we give a quick 101 regarding the most important bits that you need to know for property taxes and insurance.
FURNITURE AND APPLIANCES
Furniture and appliances are household essentials – they are absolutely necessary for us to live comfortably and efficiently in our homes. They are household essentials that turn your house into a home for living. Apart from serving functional uses, the right design and combination of furniture and appliances will accentuate the aesthetic appeal of your house.
So, what are the various methods of paying for them?
1. Bank Loans
For this purpose, a bank loan can come in two forms – a furnishing loan or a personal loan. It is necessary to highlight that a furnishing loan is distinct from a renovation loan, that is, you cannot use the funds disbursed from the latter to purchase that Milo Baughmann-esque swivel chair from luxury Italian brand, Marioni.
Furnishing loans are not offered by all banks, for it may be deemed superfluous. Personal loans, as do furnishing loans, provide quick and effective relief for negotiating a tight financial corner, but typically come at higher interest rates. Ultimately, bank loans, though effective, are forms of debt only taken on after careful consideration of your current and predicted financial health.
2. Financing (installments)
Payment in installments allow a purchase of furniture or appliance to be paid for in tranches over the course of months (or years). Some merchants, in order to increase their competitive advantage, even offer interest-free arrangements, all in an attempt to entice you to breaking your budget. Make no mistake, if your furniture budget is $5000 and you spend $7000 instead, it is still breaking the budget whether you pay upfront or $700 per month for 10 months.
An installment plan is a double-edged sword that is effective if used as part of a thought-out financing plan, but downright hazardous if used to “afford” a frivolous purchase. To put it simply, breaking down a $5000 bill into a longer period is beneficial if for the management of cash flow, and if it does not burst your budget.
3. Cash
This simple form of transaction is useful for those who have a substantial form of liquid assets and savings. The idea here is simple – why take on more debt if not absolutely necessary? That being said, do ensure that you have a significant emergency fund too before committing to upfront payment, and the last thing you’d want is to be unprepared for life’s inevitable curved balls.
So, which is the best method of the 3?
Ultimately, as with most things in life, the cliched “it depends” surmises. Each method holds its own merits but is suited for differing preferences as well as financial situations.
Bank loans are useful for those who want to improve their credit score and have comprehensively considered their future inflows/income to be sufficient to pay off the debt. They may benefit from rewards and points that come with doing business with the bank, and this could even constitute as “rebate” to offset a hefty furniture/appliances bill.
Installments can be beneficial for those who do not have a healthy credit score, or for those who prefer the repayment and installment structure of the particular plan (as opposed to that offered by banks).
Cash, as mentioned above, is most suited for those who are highly liquid and have deep emergency funds prepared. Paying for cash can have implicit benefits too in that it forces one to be more prudent in his/her choices – it is easier to get someone to think twice about a $7000 QLED television set when he needs to cough out cold, hard dollars!
PROPERTY TAX AND INSURANCE
Property Tax
As of the latest information found on iras.gov.sg, all residential properties shall be taxed on a progressive scale, that is, higher tax rates with higher annual property values. We will use the case study of a 5-room HDB flat to study the tax calculation method.
The following is an example of the breakdown of a particular annual value band (www.iras.gov.sg)
Example
Considering that the average annual value of a 5-room HDB is roughly SGD $10,000, the breakdown on the tax rate (amounting to $80) will be as follows:
To calculate the property tax of your property, head over to the IRAS website to find out your property annual value as well as the proportional tax band that it falls under.
Property Insurance
Main types of property insurance:
1. HDB fire insurance
Mandatory and provided by FWD since Aug 2019, this covers the more basal elements of the house in the case of fire. Only original elements, such as your walls, that came with your HDB are covered. Other aspects like renovation are not included in the coverage. This insurance covers the most basic, original components of your house.
2. Mortgagee Interest Policy
Almost all banks (if you had chosen a bank loan for your mortgage) will attach a policy that protects their interests in the event of a fire in your house. It is important to note that you are not the beneficiary - this policy will payout an amount with respect to the remaining loan.
3. MCST fire insurance
This insurance allows the condominium’s Management Corporation to file claim and use the payout to repair fire related damage to the building. As with the Mortgagee Interest Policy, you are also not the beneficiary.
4. Home insurance
Arguably the most important and relevant to you, this covers a wide host of protection including, but not limited to, the following:
Renovation works
Home effects
Personal legal liability
Alternative accommodation
Pets
Personal accident
Maid
Theft/housebreaking
Different banks offer different packages for home insurance, and you should select one based on personal criteria. Taking the obvious aside, that is you should only consider pets and maid insurance if you actually have them in your home, you should adjust your insurance budget to how much you actually paid for the renovation and furniture in your house. For instance, if you had a high-end, luxury renovation work already invested, you would be wise to spend a higher premium for more protection in renovation works. If you are a Bitcoin investor and keep your cold-storage devices at home, or have a safe filled with wads of cash, then you may want additional coverage to theft/housebreaking.
Ultimately, the amount that you spend on insurance should proportionately come up to the amount of benefit that you receive, be it monetary benefit or just the luxury plain old peace of mind.
