Investors use arcane-sounding financial gauges, such as the price to earnings ratio and book value, to evaluate a firm’s overall health before taking the plunge to buy its shares, for example.
The same holds true for people wanting to assess their personal financial circumstances with rigour before making a big investment decision, such as buying a house.
The Sunday Times describes the way a couple upgraded from an HDB flat to a landed property with help in their financial planning.
BUYING A LANDED HOME
Mr Nahar Azmi Abdul Majid, 46, and his wife, Madam Norharyati Hassan, 44, who are both school teachers, had no idea that they would one day live in a landed property. But with careful financial planning, the couple, with four children aged eight, 14, 17 and 19, upgraded from their five-room HDB flat to a terrace house in 2009. The house is now worth about $2.5 million, double its price tag of $1.25 million.
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It helped that the couple were brought up by financially prudent parents. They are disciplined in their spending and save zealously.
In 2003, a colleague who was moving to Australia asked if they wanted to buy his condominium. Back then, the family was living in a five-room flat in Bedok which they had bought in 1998 for $376,000.
Expecting their third child and worried about over-committing themselves financially, the couple met financial adviser Alfred Chia for the first time that year. Mr Chia is now chief executive of financial advisory firm SingCapital.
After going through a comprehensive fact-find to determine their financial position, Mr Chia advised the couple to refrain from buying their friend’s home. He explained that the added financial strain of the larger mortgage would crimp the lifestyle they enjoyed and they would need to cut back on their yearly trips abroad.
During the meeting, Mr Chia discussed options such as endowment plans for the couple’s children, Central Provident Fund investments for themselves, and insurance to secure a more comfortable life for their children should anything happen to the couple.
He also recommended unit trusts as an investment vehicle. They managed to invest in the right cycle, allowing them to enjoy a gain of more than 100 per cent over three years. This set the foundation for their landed property purchase later on.
As the family grew bigger, the couple began to look for private apartments with four bedrooms. Mr Nahar recalled spending a year – almost daily – checking out PropertyGuru, iProperty, Urban Redevelopment Authority’s latest transactions and STProperty to compare prices, locations and affordability of various homes. He finally decided on a freehold 21/2-storey terrace house in Opera Estate and bought it in 2009 for about $1.25 million. It has a land area of 1,393 sq ft and a built-up area of 2,500 sq ft.
Mr Nahar said: “It was very tedious and time-consuming but it made me understand the market better and what to look out for. The house was already built up and it had the requisite number of rooms and bathrooms. It is close to main roads and amenities and yet far enough to be quiet.
“It was priced at almost the very bottom of the market. After we bought it, prices of private homes skyrocketed.”
The couple sold their Bedok flat for $505,000, and took an 80 per cent housing loan or about $1 million for their new home. Today, they are left with $750,000 outstanding loan balance.
After the couple decided on the property purchase, paying off the loan before retirement age, and protection on the loan and property became their financial priorities.
They took up mortgage insurance – which would pay off the loan if death or total permanent disability struck – and home contents insurance, which insures the property against fire, water damage and third party liability. It turned out to be a prudent move as the family was affected by floods in 2010. The financial damage was more than $40,000. It was fortunately covered by insurance. The couple have benefited from low mortgage interest rates for the last eight years. On top of their monthly mortgage repayments, they diligently saved their bonuses and salary increments to pay down the loan faster via partial loan repayments.
Fast forward to today. They have been able to maintain their lifestyle, and the landed property has enhanced their family life.
The older children will be pursuing tertiary education, which would easily require $500,000 in education costs for all of them if they study locally, or more than $1 million if they study overseas. While saving for their children’s education, the couple are mindful of the retirement funding they hope to accumulate for their golden years.
Mr Chia noted the couple have a “balanced” investment risk profile and are using surplus CPF funds and cash for unit trust investments.
“They are on target to fulfil their various financial goals with their existing savings and investment plan. While they have no plans to cash out from their property, the strong appreciation of the property value gives them more options to fulfil their financial goals.”
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