Can You Afford A Car Now That COE Premiums Are Expected To Trend Downwards?
Certificates of entitlement (COE) premiums have tumbled in the February bidding, with the premium for bigger cars hitting a six-year low of $38,610. Although it has rebounded across the board in the last round of bidding in early March, premiums are expected to trend downwards in the near term due to a fresh supply of COEs in the pipeline for this year and next.
Good news, no doubt, since COE premiums constitute the biggest share of the cost of a car here. At one point, it was a ghastly $92,100 for category A cars! It is the indicator that always trigger demand spike or withdrawal. But does this mean you can afford a car already? We think there’s no need to rush into buying, due to FOMO or otherwise. There’s more considerations involved that you should be prudent about so as not to stretch your finances.
Heftier Down Payments & Bigger Monthly Installments
Gone are the days of 90% Loan-to-Value (LTV) and buying a car with a down payment amount that you can swallow as smoothly as prime wagyu beef with the best silky wine.
New loan regulations that came into play in 2013 meant that prospective car buyers have to cough up 40% or 50% of the purchase price as down payment, depending on your car’s Open Market Value (OMV).
| Open Market Value (OMV) | Maximum Loan-to-Value (LTV) |
|---|---|
| $20,000 or less | 60% of purchase price |
| More than $20,000 | 50% of purchase price |
Update: In May 2016, MAS eased their rules on motor vehicle financing. For OMV of $20,000 or less, the maximum LTV has been revised to 70%; for OMV of more than $20,000, the maximum LTV has been revised to 60%.
Please note that the figures computed below are based on the prevailing industry conditions when this article was written in March 2016.
Let’s take one of the popular cars in Singapore for example. The Toyota Corolla Altis 1.6L Classic’s OMV is about $17,804. Based on February figures, the COE premium is at $46,651.
The total purchase price would include:
Open Market Value—$17,804
Registration Fee (fixed)—$140
Additional Registration Fee (100% of OMV)—$17,804
Excise Duty (20% of OMV) & GST—$5,056
COE - $46,651
Total = $87,455
And guess what, the listed price for a new Corolla is $103,888, which means the dealer's margin is about $16,433. Bet you didn't know this.
Anyway at 40% down payment, it would mean your minimum initial outlay is $41,555.
In addition, with all loan tenures capped at 5 years, your repayment schedule is brutally slashed and your monthly installments shoot up. And this has not factored in the higher loan interest rates yet.
So you have to consider if you have the cash to fork out for the down payment as well as afford the higher monthly loan repayments.
Interest Rates
Unlike mortgages, car loan interest is charged upfront and on principal. So if you are borrowing $62,000 ($103,888 - $41,555, rounded down to the nearest thousand) and the interest is 2.68%, you would have paid an extra $8,308 for the car. This translates to an effective interest rate of 5.28% p.a.!
Monthly Repayment
Let’s add that up:
With this interest, your cost of car ownership is now at $103,888 + $8,308 = $112,196
Putting your annual cost at $22,439 (over 5 years) and monthly cost at $1,870.
Not Just Upfront Cost, It's Recurring Expenses
If you thought you got away with settling the upfront costs of the car, that’s not the end. You have to ensure you have enough disposable income each month to cover these ancillary expenses, other than the loan repayment. These are costs you can’t escape from if you own a car.
Petrol: Given the fuel economy of the same car above at 6.5L/100km, travelling an average of 17,800km [1] per year while paying pump price of $2.21 per Litre (Shell FuelSave 98):
That’s $2,557 in petrol money per year, or $213 per month. And $25,570 over 10 years. That’s not factoring in any price increase. We all know this oil glut ain’t gonna last forever.
Parking: Let’s just take HDB parking for ease of calculation. Season parking in designated areas such as multi-storey and basement car parks costs $90 per month. That works out to be $10,800 over 10 years (assuming you don’t upgrade to a condo, in which you usually get one free parking lot but well, you paid for that in your maintenance fees anyway).
Meanwhile, season parking at your office can cost anywhere from $100 to upwards of $200 per month, depending on where you work. At the lower end, that will mean another $12,000 over a decade. Weekend parking at shopping mall rates are not included yet.
By the way, all these expenses are based on the assumption that you drive to work. If you don’t, which means you drive at most 2 days a week, then you really might want to consider if you need a car at all (except for cases where you need to ferry family members around regularly).
Insurance: At the very least, you should have an insurance policy that provides cover for personal injury to other parties. Comprehensive policies are recommended, which would cost an average of $1,500 in premiums (not factoring No-Claim Discount or NCD) per annum. With today’s competitive market, there are more insurance services to choose from, leading to lower premiums. But bear in mind that one claim may send your premiums soaring. The interesting thing is, other drivers’ claims on the same make of car within the same insurer will also affect your premiums!
Here’s a useful FAQ on motor insurance from the General Insurance Association (GIA).
Road Tax: There's a formula for the 6-monthly road tax which is not explained but anyway it is based on the engine capacity of the car, which for our Toyota Corolla 1.6 works out to $742 per year.
So, Where Were We Already?
We’re not done yet. I’ve covered the key expenses but there’s still ERP charges, maintenance costs, grooming and accessories expenses and the occasional fines. Let’s put that at $650 per half a year. I’m not even bringing in the unexpected stuff (but that’s what insurance is for). And who knows what the Next-Gen ERP System will bring.
Just to recap:
We had a $41,888 down payment to make.
For the first 5 years at least, you need to spend yearly:
| Expense Item | Cost per Year |
|---|---|
| Loan Repayment | $22,439 |
| Petrol | $2,557 (at current prices) |
| Parking | $2,280 |
| Motor Insurance | $1,500 |
| Road Tax | $742 |
| Others | $1,300 |
| TOTAL EXPENSES | $30,818 |
That’s $154,090 over 5 years, and $41,895 (after the loan has been paid up) over the remaining 5, totalling a grand $195,985.
Hey wait, what was the listed price of the car again? Oh yes, $103,888. How did that just almost doubled?
Relooking At Affordability
Welcome to the true world of car ownership in Singapore. So it’s really not just gauged by the level of COE. It is a huge decision in itself that has a major impact on your finances and on the opportunity cost of that same amount of funds which can be channelled to other investments.
If we can compare very simplistically with taking public transport, without factoring in the intangible cost of time spent waiting and loss of comfort/increase in frustration:
MRT/Bus: $4 per day x 365 days = $1,460
Savings per year: $29,358
Cabs: $40 per day x 365 days =$14,600
Savings per year: $16,218
Hard to beat, really, and with the opening up of the transport sector – new bus operators and transport apps offering alternatives – I don’t see public transport at risk of degenerating. More likely the other way.
But numbers don’t tell everything. If your circumstances, family or work-wise, requires you to have the ability to move anytime and anywhere, then the decision of car ownership might just be a no-brainer, especially if your job can support the cost.
Sources:
www.lta.gov.sg
www.onemotoring.com.sg
www.hdb.gov.sg
www.gia.org.sg
[1] Average annual kilometres travelled per car in Singapore in 2013, from Land Transport Statistics in Brief 2014
