Compare renting with buying on the total cost of each, counting more than the monthly rent and the monthly instalment.
Comparing renting with buying usually starts with your monthly rent set against the loan instalment on a flat you like. Almost everyone makes this comparison first, and it leaves out most of what matters. A fair comparison needs two things before any amounts go in: how long you expect to stay in the next home, and a complete list of what renting and buying would each cost over that time.
Hakim and Farah rent, and their landlord has just raised the rent at renewal. Hakim complains that they pay S$2,400 a month (an example figure, as are all the figures in their case) to cover someone else's mortgage. Using a bank's online calculator, he works out an instalment of about S$2,025 a month for a resale flat in Bedok. He decides that buying costs less than renting every month, starting now. Farah isn't convinced and pushes back, and she is right to.
Rent is a pure cost: once you pay it, it is gone, and in return you get a place to live for that month. An instalment mixes two things. Interest is a cost like rent. Repayment pays down the loan and increases how much of the home you own, so it is closer to saving.
Hakim's loan would be S$427,000 at 3% a year over 25 years. In the first month, about S$1,070 of the S$2,025 instalment is interest and about S$955 is repayment. The fair comparison is the interest part against rent: about S$1,070 against S$2,400, which makes buying look even better. Even that comparison is too narrow, because buying has costs that never appear in the instalment.
You pay stamp duty and legal fees once, at the start, and never get them back. Every year, owners pay property tax, service and conservancy charges or condo fees, insurance and repairs, which the landlord usually covers when you rent. Selling later costs agent fees and legal fees.
Your downpayment, in cash and CPF, also stays tied up in the home for as long as you own it. Left in CPF or invested, it would have earned a return. That lost return is the earnings given up on the downpayment. It is a real cost, and it is easy to miss because no bill arrives for it. Farah and Hakim would put about S$213,000 of cash and CPF towards the price and fees. At an assumed return of 2.5% a year, they would give up about S$5,300 a year.
Buying fixes a large part of your housing cost. Interest rates can still 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 is commitment: you are tied to one place and one loan, and selling takes months and costs money. An HDB flat also comes with a minimum occupation period (MOP), the period an owner is locked in before they can sell.
Renting keeps you flexible. At the end of a lease you can move for a job, a school or a family need, and your cash stays free for an emergency fund, investing or other goals. The price is uncertainty: a landlord can raise the rent at renewal, or decide to sell and ask you to leave.
Neither renting nor buying is the smart choice in general. The answer depends on how long you will 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. Over two years they are a heavy cost per year, and over fifteen years they are small. Renting has almost no one-off costs, so it tends to win over short stays and lose over long ones.
Decide the stay length before comparing anything, and base it on your real plans. A couple expecting an overseas posting in three years will get a different answer from a couple who wants to live near their parents for good. If you can't decide, run the comparison twice, once for a short stay and once for a long one, and see whether the answer changes. Also check whether the stay length rules out an option. A BTO flat locks its owners in for the MOP, so any planned stay shorter than the building time plus the MOP rules out a BTO before you even look at the price.
Farah and Hakim expect to have children and want to live near Farah's parents in Bedok for at least ten years, so they choose a ten-year stay. They know a BTO flat would lock them in for its MOP, so a shorter stay would have ruled one out.
With ten years set, they list every cost on each side before adding any amounts. The renting side has the 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. The buying side has:
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 earnings given up on the downpayment agent and legal fees when you sell
The buying list is longer, but some items on it are small. What matters is that none 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.
When you add amounts later, remember that rent increases are hard to predict. Leave a cell for an assumed yearly increase and change it to see how much it matters. Changes in the home's price are even harder to predict. The course does not forecast property prices, and your comparison should not depend on such a forecast.
Now set your own stay length and write your two lists. The activity below asks for exactly that, with no amounts yet.
Write down how long you expect to stay. For that period, list every cost of renting and every cost of buying. Leave out the amounts for now.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).