It is official. CPF Board just endorsed Property Soul’s 3-3-5 rule.
The statutory board recently published an article “How to use the 3-3-5 rule to consider if you can afford your new home” in its “Are You Ready?” portal.
“Are You Ready?” is an initiative by the CPF Board to educate Singaporeans on how to plan for major financial decisions at different stages of their life cycle – from starting work, getting married, buying a house to planning for retirement.
The article also comes with an infographic using guidelines from the 3-3-5 affordability test for home buyers to calculate housing affordability.
3-3-5 rule is not conservative. It is realistic.
The 3-3-5 rule has three simple thresholds to determine whether you can really afford the home that you intend to buy.
Rule #1: 30% of property price
Guideline: Your initial capital should be at least 30 percent of the property’s asking price.
Implication: If you don’t have 30 percent cash for the property you want to buy, admit the fact that you don’t have adequate savings to buy your dream home.
Rationale: Besides paying 20 percent for the down payment, you have to set aside at least 10 percent in cash for the transaction costs such as stamp duties and legal fee.
Note that this doesn’t include the budget for renovation, furnishing and house moving after the property is handed over to you.
Forget about applying for personal line of credit or a renovation loan. Are you sure that you want to pay interest to the bank for another loan when you are already tied up with the monthly mortgage for your housing loan?
Rule #2: 1/3 of monthly salary
Guideline: Your monthly mortgage payment should not exceed one-third of your monthly salary.
Implication: If you are using more than one-third of your income to pay for your monthly mortgage, you don’t have enough buffer against potential loss of employment or future hike in interest rate.
Rationale: Installment plans and buy-now-pay-later schemes are designed for the poor. The more the poor man buys, the poorer he becomes.
Similarly, the lower the buyer’s capital, the more he needs to borrow. The higher the leverage, the riskier the purchase, and the higher the chance to default.
To lower your mortgage payment, you can either apply for a smaller housing loan, or buy a more affordable home.
Rule #3: 5 times of annual income
Guideline: The purchase price of the property should not exceed five times of your annual income.
Implication: If you are paying more than 5 times of your annual income for your home, you can’t really afford it. You need to look for a higher-pay job or settle with a more affordable home.
Rationale: Prices of private residential properties have climbed 60 percent for a consecutive 17 quarters, but only retrieved 12 percent over the last 15 quarters.
The ‘boiling frog’ effect means buyers are made comfortable paying high prices for overvalued properties because they think this is normal. The fundamentals to buy a value-for-money home or to invest based on the ROI of a property are thrown out of the window.
Stop complaining that you can’t find any property that can meet the stringent 3-3-5 rule. Take a hard look at yourself and dive deeper to research the property market and you will understand what “affordability” really means.
You may like to revisit my previous post “Why housing affordability is more than your salary” to know where you are in the four categories of affordability, namely “very affordable”, “highly probable”, “merely stretchable” and “barely reachable”.
If you are still in doubt or not yet convinced by my 3-3-5 rule, please email the CPF Board directly at email@example.com.