Posts Tagged ‘Renting’

Buying or Renting – Which is Better in Singapore?

August 7th, 2013

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With the increasing sales and rentals of homes in Singapore, we can tell that residential property is constantly in demand. As people are continually looking for homes to live in, there will always be a market for residential real estate.

Are you planning to acquire a home for yourself as well? If so, you’re probably wondering whether you should buy or rent one. In order to make a good decision between buying and renting, there are several things you have to consider.

1. Occupancy

Buying a home gives you the privilege of long-term occupancy. On the other hand, renting makes it easier to transfer after a certain period.

Consider the fact that there are times when you may need to relocate. For example, a newly-opened commercial center near your building may mean more traffic and noise, so you might want to move to a quieter neighborhood. Or perhaps you plan to send your children to a new school, and you’d like to live somewhere near it. Maybe you simply don’t get along with your neighbors and you think it’s best to transfer.

Purchasing your own property gives you a sense of permanence. You can live in your home for the long haul – there’s no need to go through the hassle of house-hunting every few months.

Nonetheless, you should buy a home only if you intend to live in it for good. If you change your mind, it may take several years before you can move out, since paying a mortgage and reselling property takes time. Also, remember that re-paying your mortgage earlier than the agreed period may mean paying a penalty. As you also need to spend for administration charges and agent fees, reselling your home may actually place a lot of strain on your budget – and don’t forget that you still have moving expenses to take care of. Furthermore, you may even lose a lot of money if the property market slows down.

Meanwhile, renting allows more freedom to change location, which is ideal for people with certain lifestyles. If you feel the need to, you can move out when your rental contract ends. You may, of course, transfer before the end of the contract, but that would mean losing your deposit.

2. Ownership

One of the best things about buying property is a sense of accomplishment, because acquiring your very own home is associated with success and stability. And since you’re the owner, you also have the freedom to renovate and customize it into your perfect dream home.

While you’re restricted from making certain renovations on a rented unit, you don’t have to live in it forever – you can scout for a more suitable residence. In case your living conditions become disagreeable, it’s good to know that you aren’t tied down to a single property.

3. Financial Considerations

Finances are probably what concerns most people when they are choosing between buying and renting a home. Naturally, you will have to consider what is more affordable and practicable at the moment.

Purchasing a home is a great financial obligation; it involves regular mortgage payments and other maintenance expenses for the next several years. In some cases, home buyers spend the rest of their lives working hard to pay off their housing loan.

Buying means acquiring a housing loan; in turn, getting a housing loan means being able to make the down payment. If you are buying a private residential property, your only option for a mortgage is a private financing company. The down payment is normally 5% to 10% of the purchase price, and it has to be paid in cash. This is for home buyers who don’t have any other existing loans; it also applies to loan tenures that will last after the buyer turns 65, or those longer than 30 years. However, for home buyers who have other existing loans, the payment amounts to 25% of the purchase price.

If you are buying an HDB flat, you are required to pay up to 10% of the purchase. The whole amount must be paid in cash, and there’s no option to pay using your CPF account. This is always the case, whether you’re buying a resale flat or buying directly from HDB – the only exception is if you’re qualified for an HDB concessionary loan. Not everyone can obtain a concessionary loan, and the only other alternative is to apply for a mortgage from a private financing company.

While a home is a primary need for everyone, there’s no such thing as a bottomless bank account. A substantial down-payment usually puts people off, and it is especially difficult for young home buyers. If you need somewhere to live but you can’t afford the down payment, consider renting. Alternately, if you can afford the down payment but you would rather invest in something else that can result in more returns for you – or perhaps something more worthwhile for you at the moment – it may indeed be better to rent a home.

A Comparison Between Buying and Renting

To further understand the advantages and disadvantages involved, you may want to take a look at some actual data. Below is a study of buying versus renting in Beacon Heights along Mar Thoma Road.

Table 1: BEACON HEIGHTS

Period

S$ psf

(Assuming a size of 1000 square feet)

S$

Median Selling Price

Sept’ 12

851

851,000

Median Rental

3Q12

3.796916

3,797

Source: URA Real Estate Information

Rental costs

Table 2: Renting a 1000 sq feet unit at Beacon Heights

3Q12 Median Rental (S$)

+ 30% (S$)

- 30% (S$)

Monthly Rental

3,797

4,936

2,658

Monthly Maintenance Fee

400

400

400

Total Annual Cost

45,963

59,632

32,294

 

Rental costs change through the years, thus we present possible scenarios in which the rent falls or rises by 30 percent.

Rental costs through a three-year period

Table 3: Renting a 1000 sq feet unit at Beacon Heights for 3 years

3Q12 Median Rental (S$)

+ 30% (S$)

- 30% (S$)

Total Cost

137,889

178,896

96,882

 

Purchase costs

Table 4: First-Year Cost for Buying a 1000 sq feet unit at Beacon Heights

Scenario 1

Scenario 2

Scenario 3

Price (S$)

851,000

851,000

851,000

Down-payment (S$)

170,200

170,200

170,200

Stamp Duty (S$)

15,024

15,024

15,024

Loss of Interest on Down-payment and Stamp Duty

1%

1%

1%

A – Opportunity Cost (S$)

1,852

1,852

1,852

Loan Quantum (S$)

680,800

680,800

680,800

Interest Rate (p.a.)

1.5%

2.5%

3.5%

B – Annual Interest Payment (S$)

10,212

17,020

23,828

C – Annual Maintenance Fee (S$)

4,800

4,800

4,800

D – Owner-occupier Property Tax* (Estimated) (S$)

1582.56

1582.56

1582.56

Total Annual Cost (S$) (A + B + C + D)

18,446.56

25,254.56

32,062.56

*To learn the computation, go here.

Purchase costs through a three-year period

Table 5: Buying a 1000 sq feet unit at Beacon Heights for 3 years*

Interest Rate (p.a.)

1.5%

2.5%

3.5%

Year 1 Interest Payment (S$)

10,212

17,020

23,828

Year 2 Interest Payment (S$)

9,940

16,207

22,532

Year 3 Interest Payment (S$)

9,515

15,414

21,283

Total Interest Payment (S$)

29,667

48,641

67,643

Total Opportunity Cost (S$)

5,556

5,556

5,556

Total Maintenance Fee (S$)

14,400

14,400

14,400

Total Property Tax (S$)

4,747.68

4,747.68

4,747.68

Grand Total (S$)

54,370.68

73,344.68

92,346.68

*Assumes that interest rates are fixed for the 3 years

Money saved from purchasing residential property, compared to renting, through a three-year period

Table 6: Cost saving from buying (3-year horizon)

Interest Rate (p.a.)

1.5%

2.5%

3.5%

A – Rental (S$)

137,889

137,889

137,889

B – Total Buying Cost (S$)

54,370.68

73,344.68

92,346.68

Savings (S$) (A-B)

83,518.32

64,544.32

45,542.32

 

It seems that buying a home saves you more money in the end, compared to renting one. However, do take note that this applies only when the situation is ideal, and may not always be the case since property prices fluctuate constantly. For instance, residential units at Beacon Heights currently sell for an amount ranging from S$1,000 psf to S$1,300 psf. If you are able to purchase a unit at S$1,000 psf, your savings will ultimately be lower.

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