Affordability

An excerpt from Straits Times Singapore

To calculate personal affordability, United Overseas Bank economist Ho Woei Chen suggests looking at it from a cash flow perspective, as banks do when they evaluate individual home loans.

Assume a couple is buying their first home and has just enough savings to pay for their 20 per cent down payment. They earn the median income last year, which was about $5,000 each.

If they want to pay for their monthly home loan instalment entirely through their CPF funds and not use any cash, the most they can pay every month is $2,070 in total. CPF contributions are capped at a salary of $4,500, and only 23 per cent of that can go towards paying for a home.

At an interest rate of between 1 per cent and 2 per cent, based on a 30-year loan, that works out to a loan of about $550,000, says Ms Ho. Taking that to be 80 per cent of a home's purchase price, the couple can buy a property worth $680,000.

This method of using monthly instalments to calculate affordability is heavily relied on by banks, which are mainly concerned with a home buyer's ability to repay his loan.

They therefore calculate how much of a home buyer's monthly income he can afford to spend on mortgage instalments. As a rule of thumb, this should not exceed 40 per cent of gross income.