Can You Afford Your Home? A Simple Affordability Test

By Property Soul (guest contributor)

Daniel is a single in his mid-thirties. He is staying with his parents now but is considering moving out on his own. He has a savings of $120,000 and is drawing a monthly income of $6,000. He is eyeing a studio unit in a newly-launched private residential project downtown as his bachelor’s pad.

Joshua and Esther are newly-weds. They have been looking for their ideal home for some time. They want to buy a three-bedroom flat in a condominium near to where Esther’s parents stay. They have a combined salary of $10,000 and savings of $150,000.

Both parties write in about buying their dream home, and drop the big question at the end:

“Is our money enough to buy the property?”

When buying properties, most people only focus on whether they have sufficient funds to settle the downpayment. But they miss the more important aspect of whether they are able to service the housing mortgage in the future.

The 3-3-5 rule

There are some general guidelines to check whether a property is affordable to you. For the sake of easy memorization, let’s call it the 3-3-5 rule.

Rule 1: 30% of property price

Your initial capital should at least be 30 percent of the property’s asking price, in order to pay for the downpayment, transaction costs and other miscellaneous expenses.

Rule 2: 1/3 of monthly salary

Your monthly mortgage payment should not exceed one-third of your monthly salary.

Rule 3: 5 times of annual income

The purchase price of the property cannot exceed five times of your annual income.

Using the 3-3-5 rule, the property purchasing power of my two groups of readers can be summarized in the table below.

Table 1.1 Calculating property purchasing power using the 3-3-5 rule

For Daniel, he can only afford to buy a property priced below $360,000. Since he relies only on a single income to support his property, he has higher risk than the couple. His approach should be more conservative.

As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. If they want to increase their budget, they should find ways to save more before plunging into the market.

Why you need to be conservative?

Sounds tough, doesn’t it?

But so far for all my property purchases, I have been able to stick to the 3-3-5 rule.

To buy an investment property, you’d rather be conservative than aggressive. To support your home, you’d better be safe than sorry.

If you have problems even paying for 30 percent of the property, you can’t really afford it.

If the value of your target property far exceeds five times of your annual income, you are either buying an overpriced property or buying a property out of your reach financially.

Many people buy their home without thinking carefully. They are tempted to use the government housing grant or subsidy for first-time buyers.

You may not aware of the fact that this small amount of subsidy, say, $30,000 or $40,000, can easily be offset by the fall in your property’s value when the bear market comes after your purchase. You are left to pay the outstanding loan from an overpriced property.

Interest rates can go up. Property prices can go south. Jobs can be lost.

Do you have the holding power to go through the next property cycle? Would you still be able to service your housing mortgage under all circumstances? Do you have the cash reserve to top up the difference in case your property’s value drops below the market price?

If you can’t give a definite answer, you are not ready yet.

By guest contributor Property Soul, a successful property investor, blogger, and author of the newly released No B.S. Guide to Property Investment. Posted courtesy of, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.

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