A head for figures

Can you afford your dream home? Here is how to do the math.

By R Sivanithy

You are eyeing a two-bedder in that swanky new neighbourhood. The selling price is $1.5 million. You can afford it, with a loan. But hang on — just how much, exactly, will that interest rate on your mortgage impact what you will actually wind up paying?

In fact, the price of your dream flat could be far greater.

A simple formula for calculating the real cost is this:
C = (P x M) + D + F
C: cost
P: monthly payment
M: number of months in the loan term
D: down payment
F: fees to be paid (eg. stamp duty, legal fees)

Assuming you plan to finance the $1.5-million property with a down payment of $300,000 and a loan of $1.2 million. Depending on the interest rate, your sums should look something like this:

EXAMPLE #1

The cost is $1.5 million financed with a down payment of $300,000 and loan of $1.2 million. If repayment is over 30 years and interest rate is 2 per cent, the monthly sum will be $4,435.

The total that will be paid over the 30 years is $1,596,756, including $396,756 in interest. As such, the true cost will be $1,896,756 ($300,000 + $1,596,756), excluding stamp duties, legal fees and so on.

EXAMPLE #2

Assuming the cost, down payment and tenure remain the same, but interest is pegged at 1.5 per cent.

Your monthly payment would be $4,141 and total interest paid $290,919. In other words, that is a difference of $105,837.

Based on the above, you are better off trying to get cheaper financing than negotiating a reduced price on the property. There are many online mortgage calculators that buyers can use to figure out the real cost of the purchase.

Selling your home? Add the cost as calculated above to the renovations made over the years, maintenance fees, property taxes and other relevant costs, and deduct the total from your selling price.

If you made 50 per cent over 10 years, you could benchmark this performance against the Urban Redevelopment Authority Index. On top of the usual quarterly or yearly results they announce, there is ample historical data available that you can reference.

GET TO KNOW KEY INDUSTRY JARGON

Replacement cost (RC)
What it means: The amount that an insurer has to pay to restore a property to its original condition.

ACV (Actual cash value)
What it means: The value that you get after deducting the value of depreciation of a property from RC.

PMI (Private mortgage insurance)
What it means: Also known as a Mortgage Reducing Term Assurance (MRTA). This covers your home loan, so that even if you lose your job, the policy takes over the payments.