Property Debt comfortable level

A good article on Wallstraits by Dennis on property loans advice

Below is what I shared at another forum, warning Forumers the dangers of over-borrowing and Never, Never, Never Over-borrow.

Cheers!Dennis Ng

If a person or household earns $5,000, keeping Debt-service ratio at 35% (or max Housing Loan instalment of S$1,750), and assuming a 25 years loan period, and an interest rate of 4% (it's better to assume a higher interest rate to be Prudent), the Maximum Housing Loan a person should take (assuming NO other debt) is about S$331,541.85.

Assuming this person takes a 80% Loan, max purchase price of Property is S$414,427. I read somewhere that the average Household income is over S$6,000 (not S$5,000). Using S$6,000 to calculate instead, max Purchase Price of Property is S$500,000. It does appear that current property prices are above what a person can comfortably afford, according to Prudent Personal Finance Principles. Note: banks are comfortable with 40% Debt-service ratio, if we use 40% instead, the max loan would work out to S$454,686 and max purchase price of properties would be S$568,357 instead.whether based on Median Income or Average Income, if we use Prudent Financial Principles as a guide, I agree that property prices are currently above the prices what a person can comfortably buy and comfortably borrow. I would advise a max loan financing of 80%.

If people NEED* to take 90% financing, they are buying/borrowing over their means. We should NEVER, NEVER, NEVER over-borrow. Over-borrowing can lead to a person's Financial Demise. *Note: this is different from a property investor who CHOOSES to take a 90% financing to minimise Cash Outlay but who have the Financial Means to make a 20% downpayment.

Another thing people should note is that current property prices are already much higher than say, 2 years ago, and as prices move higher, risks increase instead of reduce.And the economy is slowing down and there might be retrenchments in future due to economic uncertainties. Thus, anyone buying a property should standby Cash/CPF sufficient to pay for at least 12 months to 24 months of Housing Loan instalment as a "Safety Buffer". This will ensure he/she can continue to service the Housing Loan even if he/she lose his/her income. If they cannot afford to do what I advise, suggest that they NOT buy a property, they should continue to save some more money so that they can meet the guidelines I shared.

Cheers!Dennis Ng