(This article was written before 30th September 2022 property market cooling measures)
A client called me in one day and asked if he should help to pay the down payment of a 2 million dollars condominium for his child who is getting married end 2022. After a few questions, I told him he is “cursing” his child.
Read on to find out more about this conversation.
It was mid-June 2022 John (not his real name) called me in and told me his son is planning to get married end 2022. They have balloted for a BTO recently and it will not be around 3 to 4 years before they could get the key.
It seems to me; the young couple does not want to stay with their respective in laws as they want to have their own lives. At the same time, renting a flat of convenient location for them to go to work will cost them between $3,500 and 4,200 per month which they cannot afford, since this rental will be cash payment every month (as compared with a mortgage which they can part pay using CPF). So, John thought of giving them a head start by paying the 20% for the young couple for a newly launched private property near an MRT station. Perfect, so he thought.
Let us do some simple mathematics. (I am not even taking Total Debt Servicing Ratio into account)
After 20% down payment, loan amount will be $1,600,000.
Assumed loan tenure is 25 years and interest rate at 2% fixed, which is difficult to get these days.
This will work out a monthly principal payment of $4,115.00 and interest payment of around $2,600 a month. Total payment of $6,715.00. The couple’s total combine income must be less than $12,000 since they can ballot for a flat. This works out to be more than 55% of their gross monthly income, leaving them with very little bandwidth for other expenses like condominium management fees and sinking fund, utilities, daily expenses, taxes, and expenses for child when have one, most important of all, saving for raining days.
After this simple math, he realised that he is not helping them to build a sound, not to mention a strong financial foundation. Instead, he is sort of pushing them into an unsustainable debt position. “So,” I asked him, “your help is a blessing or curse?” Going forward, I suggested to him to get them to sit down and start working on a budget. Through the budget, they will have a fairly good idea what they can and cannot afford.
I told him to get this young couple to sit down with me and do the math together. The meeting is yet to materialise for whatever reasons, but my point here is, as parents, we should do the math with our children before we dive into this financial commitment with them.
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.