It is official. CPF Board just endorsed Property Soul’s 3-3-5 rule.
The statutory board recently published an article “How to use the 3-3-5 rule to consider if you can afford your new home” in its “Are You Ready?” portal.
“Are You Ready?” is an initiative by the CPF Board to educate Singaporeans on how to plan for major financial decisions at different stages of their life cycle – from starting work, getting married, buying a house to planning for retirement.
The article also comes with an infographic using guidelines from the 3-3-5 affordability test for home buyers to calculate housing affordability.
3-3-5 rule is not conservative. It is realistic.
The 3-3-5 rule has three simple thresholds to determine whether you can really afford the home that you intend to buy.
Rule #1: 30% of property price
Guideline: Your initial capital should be at least 30 percent of the property’s asking price.
Implication: If you don’t have 30 percent cash for the property you want to buy, admit the fact that you don’t have adequate savings to buy your dream home.
Rationale: Besides paying 20 percent for the down payment, you have to set aside at least 10 percent in cash for the transaction costs such as stamp duties and legal fee.
Note that this doesn’t include the budget for renovation, furnishing and house moving after the property is handed over to you.
Forget about applying for personal line of credit or a renovation loan. Are you sure that you want to pay interest to the bank for another loan when you are already tied up with the monthly mortgage for your housing loan?
Rule #2: 1/3 of monthly salary
Guideline: Your monthly mortgage payment should not exceed one-third of your monthly salary.
Implication: If you are using more than one-third of your income to pay for your monthly mortgage, you don’t have enough buffer against potential loss of employment or future hike in interest rate.
Rationale: Installment plans and buy-now-pay-later schemes are designed for the poor. The more the poor man buys, the poorer he becomes.
Similarly, the lower the buyer’s capital, the more he needs to borrow. The higher the leverage, the riskier the purchase, and the higher the chance to default.
To lower your mortgage payment, you can either apply for a smaller housing loan, or buy a more affordable home.
Rule #3: 5 times of annual income
Guideline: The purchase price of the property should not exceed five times of your annual income.
Implication: If you are paying more than 5 times of your annual income for your home, you can’t really afford it. You need to look for a higher-pay job or settle with a more affordable home.
Rationale: Prices of private residential properties have climbed 60 percent for a consecutive 17 quarters, but only retrieved 12 percent over the last 15 quarters.
The ‘boiling frog’ effect means buyers are made comfortable paying high prices for overvalued properties because they think this is normal. The fundamentals to buy a value-for-money home or to invest based on the ROI of a property are thrown out of the window.
Stop complaining that you can’t find any property that can meet the stringent 3-3-5 rule. Take a hard look at yourself and dive deeper to research the property market and you will understand what “affordability” really means.
You may like to revisit my previous post “Why housing affordability is more than your salary” to know where you are in the four categories of affordability, namely “very affordable”, “highly probable”, “merely stretchable” and “barely reachable”.
If you are still in doubt or not yet convinced by my 3-3-5 rule, please email the CPF Board directly at member@cpf.gov.sg.
Did you watch my video “2018 Singapore Property Market – what developers, agents, banks and analysts are hiding from you”? Watch it now!
Thank you for posting. May I clarify:
If buyer is able to increase rule 1 above 30%, does that compensate lacks in rule 2 and 3?
In rule 2, do we use the gross income or take-home pay?
Does rule 3 annual income include bonus or just the monthly income x 12 months?
No, you must meet the criteria of all the three rules. Of course, if the buyer can pay a higher percentage for the down payment, he can apply for a smaller housing loan and his monthly mortgage payment will be lower.
Since you can use your CPF for the down payment and mortgage payment, you can do the calculations based on monthly salary before contribution for CPF.
Forget about bonuses, commissions, dividends from your company, They are variables that can be cut any time when the company is not doing well.
Congratulations!! 🙂
Thanks Jacky!
The comments posted in CPF’s FB page are full of disbelief over this 3-3-5 rule. There is obviously a mass of deluded people who are not cognisant of the realities and risks of over-leveraging.
Yes, good to see potentail homebuyers debating over the 3-3-5 rule.
The purpose of coming up with the 3-3-5 affordablity test in this blog and in my book is to create awareness of sensible home buying and prudent property investment.
Too many people think that the current high prices are just “normal”. It is when the market direction reverses that buyers begin to realize that they have overcommitted in properties.
Bought your book once it came out. About time CPF recognized this method of evaluation for suitability! Nice job.
Thanks Tony. The existing TDSR test is only imposing restrictions on financing and refinancing. The 3-3-5 rule can help buyers to evaluate their affordability when they plan to buy or upgrade to any type of housing.
Hi
With ABSD for 2nd property, does it mean that one if buying 2nd property should have 40% ready if one wants to stick with the 3-3-5 rule?
Just allocate an additional amount for your ABSD on top of your savings of 30% of the property’s asking price.
assuming the price is 500k.
so this 30% is for the d/pay? (not including the stamp duties/etc)
or is it 20% to d/pay and the 10% for the stamp duties/ etc?
The 30% is including the 20% deposit, stamp duties and legal fee.
Hi Vina, thank you for writing this article. Am a newbie. Looking at possibilities of upgrading. While in the midst, invited a couple of property agents to present with the current “noise” of upgrading to private and financial freedom. Was questioning them (in my hear though) how can someone who stretch their finance to purchase 1 or 2 properties at more than 1 mil have a good night sleep? They did explain the magic of leveraging but was still skeptical. I did my own simple calculation and found out that it is just not advisable to stretch my finance to the extreme. Reading your post indeed gave another resounding claim to my 1st belief. Crazy to see how people are jumping on this bandwagon. I believe the value of the house is more important the buying/selling price. I will stick to this 3-3-5 rule. WIll purchase within my budget so to have a good night sleep.
Thanks for sharing. Upgrading one’s home and investing in properties for financial freedom are two totally different things. But both are only recommended to proceed if they are well within your means.
You should only listen to advice from neutral parties who do not have vested interests. The job of property agents is to sell you the properties they are marketing and get you the home you want. And bag their commission after the transaction goes through. After that, they are completely off hand. You are the one to deal with your the housing loan, interest rate hike, economic downturn, soft rental, bad tenancy, etc.
Rule 3 is redundant.
Hi, As a first time buyer, i am confused on the Rule no 3.
Example, a person with a salary of 3500. Then base on this. He can only buy a HDB of 210k.
Likewise for a 5000 salary, he can only afford a 300k HDB?
Am i being correct on this? It seems too constrained of a budget to base on for house buying,
Yes, this is exactly what I mean. Honestly, properties that can’t pass through your 3-3-5 rule are either not affordable to you, or the current market prices are too high. Though buyers with tight budget and property agents would be very happy if I could come up with a 1-2-10 rule.
Hi,
I came across your blog after searching for affordability advice and is fascinated by your formula.
I earning 8700 per month as my gross salary and based on your formula rule 3, it seems that the highest value that I can invest is 522k. Is there a way to overcome rule 3 by putting down a larger deposit?
I am afraid not. Unless you can settle the majority of the purchase price in cash. You have 3 options here: 1) Find ways to increase your income; 2) Settle for an affordable home; and 3) Wait for prices to come down.
Just some hypothetical scenario,
let say if i want to buy a property that cost 900k with my 8700 salary, The safest bet is to go with 50-60% of it in cash?
The higher the better. For me, every time I buy a home, I will ensure that I have enough liquidity to pay it in full at any time. I get a loan just because the interest rate is low and I can free up the cash to invest in something that pays the same interest or higher in return. Remember: the home you are staying in, if under a bank loan, is always a depreciating liability, not an asset. You can generate any income from your home and it is not counted in your net worth.
for the initial deposit that is…
Hello, I am in my early 40s. I have abt 500k in my CPF and earn about 9k per month.
Based on rule 1, I can afford a 1.5mil property.
Based on rule 2, I can afford a 875k property (after 20% downpayment)
Based on rule 3, I can afford a 540k property.
I am a little confused and worried. Are you saying that based on rule 3, I should never buy a 1 mil property as the risk is too high? Cos my salary isn’t likely to double in the near future!
It is whichever that is lowest. So it is not $1 million but $540k. You either have to look for ways to increase your income and savings, or avoid buying an overpriced property. Stop listening to those property agents who claim that having a combined income of $6,000 can afford a private property. If your salary is your only source of income, you should be more prudent and avoid over-leveraging. Buy whatever you feel comfortable with and can easily pay off the outstanding mortgage any time. What’s the point of owning a home that creates so much stress on you and our family in good and bad times?