By Sherlyn Chua (guest contributor)
A real estate purchase is a huge financial commitment, and is probably the biggest purchase many of us will make in our lifetime. This is especially so in Singapore where homes do not come cheap; it’s one of the main reasons why most of us continue to live with our parents until the day we get married, and only then step foot into our matrimonial homes. Houses developed and sold by the Housing Development Board also come with certain eligibility conditions. For example, an unmarried person cannot buy a flat unless he/she is at least 35 years old.
We all come from different walks of life. Perhaps you may currently be in a romantic relationship, looking for a place to settle down with your partner. Perhaps you may be embracing singlehood, aspiring to move out from your parents’ home to stay on your own. Or maybe, you are currently living out of Singapore, but have recently been offered an opportunity to live and work here.
In any of these above scenarios, one question you may find yourself asking is, “Should I rent or buy?” The following are some factors that analyses the pros and cons of both sides, to hopefully help you make a more informed decision.
Factor #1 – Upfront/initial payment
When it comes to initial payment, renting is, without a doubt, the cheaper option. The upfront cost to rent a property is usually two months’ worth of rent. Putting the down payment on a property will set you back a lot more, at a figure that ranges between 20 to 30 percent of the price of the property.
For example, a property valued at $1 million will cost you approximately $3,000 to rent (hence, $6,000 as a deposit). The same property will require $200,000 to $300,000 as a down payment if you intend to purchase it.
Factor #2 – Ongoing Costs
While paying off your mortgage brings you closer to the full ownership of your home, paying rent is quite the opposite. In fact, paying rent is equivalent to throwing money out the window – there are no opportunities for capital gain since ultimately, you do not own the property. Paying rent is comparable to paying off a car loan, as your capital gain is tantamount to nothing.
Management fees and property taxes will cost between 0.2-0.3% of the property value each year. These are the fees you would have to bear as a homeowner or landlord, but good news for tenants – they are off the hook for this!
Factor #3 – Capital Gains
Speaking of capital gain, owning a property allows you to build up equity – possibly a significant amount too! Owned property is an asset. Whether you are staying in it and building equity, or renting it out and earning passive (rental) income, this potential gain is something you will miss out on should you choose to rent instead.
With an average inflation rate of 2.7%, your property value would double in about 25 years (compounded). To put it simply, a $1 million property will probably be worth about $2 million in 25 years (if inflation is similar to the historical long term average).
Factor #4 – Subsidies, Grants and Duties
For those of you looking to buy an HDB flat, the good news is that you can take advantage of the subsidies and grants put in place by the Government, especially if you are a first-time buyer. That said, however, you can only purchase an HDB flat if you are a Singapore citizen or a Singapore Permanent Resident, albeit with certain conditions or requirements.
According to www.hdb.gov.sg, the HDB Resale Price Index moved from 88 to 133 over the last 20 years. This translates to a 51% gain in terms of the value of the HDB flat if you have bought it in 1997 (i.e. a $300,000 flat purchase then would be able to fetch $453,000 today)
For foreigners, purchasing a property means incurring additional stamp duties, which might make it less costly to rent a property instead. Furthermore, foreigners are not eligible for subsidised HDB flats and grants. The good news is that according to www.ura.gov.sg, the Singapore Property Price Index saw an increase from 30 to 140 in the last 30 years (i.e. a $1 million property purchase would translate into a whopping $4.6 million!)
Factor #5 – Level of Commitment
The duration of your stay will also be a determining factor when deciding whether to rent or buy. If you consider yourself a nomad and want to stay in a different part of Singapore every few years, then the rental option gives you the freedom to move around.
But if you are looking to settle down and are ready to commit to something for the long term, then buying would be the more suitable option.
Factor #6 – Structural Changes
For many of us, our home is our personal sanctuary. We like to design the interiors of our homes, down to the colour of each wall or the look of each marble floor tile.
Changes to the interior of our homes can be more important to us than we realise, and having a limit put on it may have us yearning for more. If you were to opt to rent a property, the amount of structural and physical change you can make to your home is limited, compared to buying a property, where you have complete freedom to alter the entire look of your home, both inside and out.
Factor #7 – Maintenance
Let’s face it: some of us lead such busy lives that we barely have the time to visit the dentist on a regular basis, let alone maintain a home. This is where being a tenant would be more suitable than being a home owner, as you have less obligations committed to maintaining your home. Most major repair works are usually serviced by the landlord, although with certain exceptions (e.g. air-con servicing).
At the end of the day, your decision boils down to these factors. Many of us chase after the Singapore dream of home ownership, a place where we can call home. We may also keep it around long enough for us to retire in, or even pass it down to future generations. But renting does come with its advantages and may the right option for you.
Sherlyn is an Associate Director of Redbrick Mortgage Advisory. Prior to joining Redbrick, Sherlyn had experienced working in both offshore and local financial institutions, handling various products such as corporate cards and secured loans. She previously specialized in mortgage loans for commercial and residential properties, but the dynamics of real estate fascinated her and she was keen to take on the role of helping customers as an advisor instead. To get a free consultation on your new loan or refinancing needs, please head to www.propwise.sg/mortgage/