You will be able to compare renting with buying on total cost rather than on rent versus instalment.
"We're paying S$2,400 a month to make someone else's mortgage payments," Hakim said. He had found a bank calculator online, and the instalment on the Bedok resale flat came out at about S$2,025 a month in this example. To him it was settled: buying costs less than renting, every month, starting now.
Farah wasn't convinced, and she was right to push back. Rent against instalment is the comparison almost everyone makes first, and it leaves out most of what matters.
Rent is a cost. Once you pay it, it is gone, and in return you get a place to live for the month.
An instalment is two things mixed together. Part of it is interest, which is a cost in the same way rent is. The rest repays the loan, which is closer to saving: it raises how much of the home you own. In this example, in the first month of a S$427,000 loan at 3% a year over 25 years, about S$1,070 of the S$2,025 instalment is interest and about S$955 is repayment. So the like-for-like figure is closer to S$1,070 against S$2,400, which flatters buying even more. That is why the comparison has to go wider, because buying also brings costs that never show up in the instalment at all.
Stamp duty and legal fees are paid once, at the start, and never come back. Property tax, service and conservancy charges or condo fees, insurance and repairs are paid every year by owners and are usually covered by the landlord when you rent. Selling the home later costs agent and legal fees.
Then there is the downpayment. In this example, Farah and Hakim would put in about S$213,000 of cash and CPF towards the price and fees. That money is tied up in the flat for as long as they own it. Left in their CPF accounts or invested, it would have earned something. If they assume an example return of 2.5% a year, that is about S$5,300 a year they give up, a cost that is easy to miss because no bill arrives for it.
Buying fixes a large part of your housing cost. Interest rates can move, and lesson 5.2, Fixed, floating and SORA-pegged packages, shows how much, but nobody can raise your rent or end your lease. You decide how the place looks, and any rise in its value is yours. The price of that is commitment. You are tied to one place and one loan, an HDB flat comes with a minimum occupation period, and selling takes months and costs money.
Renting keeps you flexible. You can move for a job, a school or a family need at the end of a lease. It also keeps cash free for an emergency fund, investing or other goals. The price of that is uncertainty. A landlord can raise the rent at renewal, as Farah and Hakim just found, or decide to sell and ask you to leave.
Neither is the smart choice in general. The choice depends on how long you'll stay.
The one-off costs of buying, stamp duty, legal fees and the selling costs later, are spread over the years you own the home. Stay two years and they are a heavy annual cost. Stay fifteen and they are small. Renting has almost no one-off costs, so it tends to win over short stays and lose over long ones.
So before you compare anything, decide how long you expect to live in the next home. Use your real plans. A couple expecting a posting overseas in three years has a different answer from a couple who wants to be near their parents for good. If you can't decide, run the comparison twice, for a short stay and a long one, and see whether the answer changes.
Farah and Hakim chose ten years. They expect to have children and want to be near Farah's parents in Bedok for at least that long. They also know a BTO flat would lock them in for its minimum occupation period, so any stay shorter than the building time plus the MOP rules out a BTO before price even comes up.
With the stay length set, they listed every cost on each side for those ten years, before putting in any amounts:
Renting: monthly rent, rent increases at each renewal, agent fees and moving costs each time they move, the security deposit tied up, and what their savings would earn if kept free Buying: stamp duty, legal and valuation fees, cash over valuation, renovation, loan interest, property tax, service and conservancy charges, fire insurance and home protection cover, repairs, the earnings given up on the downpayment, and agent and legal fees when they sell
The buying list is longer, but some of those items are small. What matters is that none of them is missing when the amounts go in. Lesson 1.5, Compare two homes over ten years, and lesson 7.4, Build your annual cost of ownership, fill in the figures.
Rent increases are hard to guess, so leave a cell for an assumed yearly increase and change it to see how much it matters. Price changes for the home are harder still. This course doesn't forecast property prices, and your comparison shouldn't depend on one.
Now set your own stay length and write your two lists. The activity below asks for exactly that, with no amounts yet.
Write your expected stay length and list every cost on the renting side and the buying side for that period, without amounts yet.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).