Friday, August 27, 2010

Buying within your means

First time home buyers in a rush to secure a home may inadvertently commit themselves to properties beyond their means.

It is important to take a long-term perspective on housing affordability since mortgage payments take priority over other basic necessities. In Singapore, affordability is measured by the ratio of monthly mortgage payment to current monthly household income with a cut-off ratio of 40% by banks to decide on home loans. However, this might not be a good measure of affordability.

Ratio of house to lifetime income can be a better indicator of housing affordability. Homebuyers need an estimate of their lifetime income after they know the prices of the houses they want and the transaction costs.

The table provides illustrative computations of housing affordability for three income group references by focusing on young homebuyers.

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