Pros and cons of renting and buying a property
Rent vs. Buy: The financial decision for your lifestyle
Singapore homes are rising in cost and there’s a good chance that a 20 to 25 year home loan means spending most of your life paying for your property; and not everyone may be ready for such a large commitment. That brings up the alternative of renting; but depending on your lifestyle right now, how do you know which is right for you? Here are the main considerations:
The key differences between renting and buying
Here’s a quick snapshot of the differences to know about:
| Renting | Buying | |
| Initial costs | Much lower than buying: One to two months’ rent as a security deposit, depending on the length of the lease. If the unit is unfurnished, you may also need to buy appliances and furniture. |
A significant sum, and it often takes years to save up just for the initial cash outlay: For bank loans, a minimum down payment of 25% of the property price or value (whichever is higher). For HDB loans, a minimum down payment of 20% of the property price or value (whichever is higher). There is also a Buyers Stamp Duty (BSD) and the cost of renovations. You also need to pay a law firm for conveyancing fees. |
| Recurring costs | Generally lower than buying, but it depends on the rental rate you accept: You need to pay the agreed-upon rent every month, and the amount can increase or decrease at the end of your lease. You sometimes need to pay for utilities like power, water, wi-fi, etc. depending on your Tenancy Agreement. It is common for tenants in Singapore to handle regular air-con servicing. |
Usually higher than renting, but costs are highly variable based on your loan amount and the property in question: You need to pay the monthly mortgage, and the interest rate can change. HDB flats have monthly conservancy charges, while private properties have monthly maintenance fees based on the size of the unit (though these are usually collected quarterly). You need to pay for utilities, as well as other maintenance like repairs or the air-con (unless you rent out and have a tenant to cover part of the cost). You need to pay property taxes, which are based on the estimated Annual Value (AV) of your property. |
| Eligibility | Anyone with a valid reason to be in Singapore can usually rent. As long as you are a citizen or PR, or have a valid student pass, employment pass, etc. the landlord will usually rent to you. However, some landlords may impose their own limitations (e.g., some landlords prefer not to accept student tenants). |
Citizenship status has a bigger impact if you want to buy. Only Singapore citizens and PRs can buy HDB flats, and there is a long list of eligibility requirements - these range from income ceilings to ethnic quotas. For private properties, citizens and PRs are free to buy most properties anywhere; but foreigners cannot buy landed property outside of Sentosa without special permission. |
Appreciation / Gains |
There are no gains if you’re renting. Rental is purely an overhead. You get a roof over your head, but nothing else at the end of the lease. |
Properties can appreciate in value over time. You can often sell your property (HDB or private) for more than you initially purchased it, although this is not guaranteed. |
Liquidity issues |
The security deposit is locked for the duration of your lease. Ideally, you will get back the deposit in full at the end of the lease (if you don’t need to pay for any damages). |
Property is a highly illiquid asset. You cannot easily or quickly convert your property to cash, and it can take several months to sell. Transaction costs also make it expensive to sell property, as you may need an agent to market and sell the unit for you; this incurs fees. For HDB properties, there is a Minimum Occupancy Period (MOP) that prevents you from selling for five to 10 years. For private properties, you need to pay an additional tax (the Sellers Stamp Duty) if you sell within three years of buying a property. |
In general, renting is more accessible, and requires less of a commitment. Consider that the down payment on a 4-room flat, which costs $350,000, is already $70,000 (with an HDB loan) or $87,500 (with a bank loan). This is before even factoring in Buyers Stamp Duty, legal fees, administrative fees for the bank loan, renovations, etc.
Unless you have been deliberately saving for years, buying is not likely to be an option.
Eligibility requirements are the next major hurdle. If you’re buying an HDB flat, as most Singaporeans do, you need to purchase under one of HDB’s schemes: this means restrictions like being unable to buy as a single until you’re 35, an income ceiling of $14,000 per month, meeting the ethnic quota, and so forth.
If you can’t meet the eligibility requirements for an HDB flat, and can’t afford a private property, you may have no choice but to rent.
Assuming both options are open however, here’s what to consider next:
What lifestyle aspects affect your choice to rent or buy?
- Readiness to settle down
- Needs of school-age children or other dependents
- Long-term retirement goals
- Your financial situation
- Your age
1. Readiness to settle down
If you’re ready to settle down and start a family, or to “plant your roots” so to speak, then buying is a better option if you can manage it. It’s not ideal for families to be subject to the needs of their landlord. A landlord can, for instance, raise your rent at the end of the lease, regardless of your financial situation. Landlords can also impose rules like preventing you from cooking in the unit, or owning pets - all of which may run contrary to your spouse or children’s wishes.
A landlord may even sell the property or agree to an en-bloc sale, thus breaking your lease and leaving you scrambling for new accommodation (albeit with some compensation).
On the flip side, if you are single or a young couple, you may not want to be tied down by home ownership. If you don’t yet have a regular income, are pursuing work overseas, are just starting your own business, etc., then you probably don’t want to be constrained by a five-year Minimum Occupation Period (MOP), or a huge commitment of capital.
2. Needs of school-age children or other dependents
If you have children, you may know that school enrolment is based on distance: your child must be living within one-kilometre of their school to be given priority. If you live any further, it becomes much harder to get in.
Government regulations aside, it’s problematic if you have children, and your landlord suddenly decides it’s time for you to leave. The last thing you want is your children to end up being an hour or more away from school; or being so far that they have little chance of getting into the school of choice.
Some children may also need the support of grandparents or nearby childcare facilities, as it’s not always possible for everyone to have a domestic helper, or be a stay-at-home parent. In these instances, home ownership is preferable, for the sake of the children.
The same goes for dependents such as special-needs family members, or the elderly. Being forced to move can be stressful for these people, as they will need to relearn transport routes, and re-integrate into a new community of strangers. They may even need to change clinics or related healthcare services, thus losing access to doctors they’ve known for decades.
On the flip side, if none of this is a concern to you yet, you may be better off saving money and just renting for now.
3. Long-term retirement goals
Some forms of retirement planning may use property ownership to meet goals. A common example of this is aiming to downgrade from a private property to an HDB flat upon retirement (or to downgrade from a bigger flat to a smaller one). The surplus money, after purchasing a replacement home, is used to increase the retirement fund.
Some also have more ambitious goals, such as retaining their flat as well as a private property - this allows them to rent out one of the two properties for rental income, thus providing for their twilight years.
That being said, not all retirement planning must involve property. Some may choose to grow their retirement fund through other assets like unit trusts, annuities, endowments, etc., and are thus willing to rent for longer periods.
There are also some high-net worth individuals who are single for life, and who do not buy homes. As they have no one to leave a property to, and they don’t need property gains, they may live in serviced apartments or similar luxury options for the rest of their retirement years.
4. Your financial situation
A common rule of thumb for property ownership is the 3-3-5 rule. This means you should have 30% of the capital needed to buy, the monthly loan repayment should not exceed 30% of your monthly income, and the total home price should not exceed five years of your income.
If you cannot meet the 3-3-5 rule, you may consider renting first, while saving money for your first home. Remember that HDB flats require a five to 10-year MOP, and private properties have an added stamp duty if you sell in the first three years. This means that you can get into serious financial trouble if you buy now, and find you cannot handle the costs later. If you are forced to sell your home on short notice, or the bank forecloses on it, you may take decades to recover from the damage.
Having proper insurance coverage is also a critical component of your financial situation.
It’s inadvisable to buy a home before you have comprehensive insurance, in the form of health insurance, mortgage insurance, and critical illness insurance.
Critical illness insurance is especially vital, as you still need to keep paying the home loan even if you’re diagnosed with a serious illness like a stroke, heart attack, or cancer. Some policies, such as Great Eastern’s GREAT cover series, can provide lump sum payouts in early or intermediate stages of critical illness, not just the final stages. This ensures you can keep the mortgage paid, even if you’re unable to work while seeking recovery. You can even be protected multiple times from the same condition (e.g., you can be covered again, if there’s a second stroke, heart attack, etc.)
It’s also important to have mortgage insurance, which pays off the outstanding home loan in the event of death or disability. This way, your family won’t need to use the benefits of life insurance to pay for the home. Mortgage insurance is mandatory for HDB properties, under the Home Protection Scheme; but private property owners must seek out and buy mortgage insurance of their own accord.
5. Your age
If you’re currently renting, you should set a target age at which you want to become a homeowner; and you should consider doing so before you go past the age of 40.
One reason is financing restrictions. Your maximum home loan tenure, plus your age, cannot go past 65 without restrictions. If you are 45 years old, for example, you can only take a 20-year loan without restrictions.
If your loan tenure plus your age exceeds 65, the maximum amount you can borrow will be reduced; you might need to pay as much as a minimum of 45% of the price as the down payment. Coupled with the fact that our income may decline as we get older, renting for too long might affect our chances at home ownership in later years.
There is another reason to get your home before you go past the age of 40: this is to try and ensure you don’t have large debt obligations as you come closer to retirement age. If you start paying for your home too late, it increases the risk that you still have monthly repayments when you’re 55 years or older - a potentially stressful situation, which can disrupt your retirement plans.
So while it’s fine to rent while you’re younger, do still plan ahead for long-term ownership.
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