As you compare various Singapore home loan rates and packages to find the best home loan deal, you are likely to encounter some financial jargons that might seem difficult to comprehend. One such financial jargon is the Loan-to-Value (LTV) ratio.
Technical as it may sound, every property buyer needs to understand how it will affect their chances of securing a mortgage loan in Singapore. This article guide will explain the technicalities of the ‘LTV ratio’ in simple and clear language.
Whether you are taking a HDB loan or bank loan, the Singapore government has set a limit for bank housing loans. This limit is called the Loan-to-Value (LTV) ratio or the maximum loan quantum.
Your LTV limit can tell you what you can (or cannot) afford. It is one of the key intervention policies implemented by the government of Singapore aimed at safeguarding homebuyers from over-borrowing as well as cooling off the real estate market.
According to the Monetary Authority of Singapore (MAS), the LTV ratio or limit is the maximum loan amount you can borrow quoted as a percentage of the property’s current market value. It denotes the maximum loan amount a bank or financial institution is allowed to issue to a prospective homebuyer to finance a property.
For example, the maximum LTV ratio offered by banks is 75%, which means you can borrow up to $750,000 for a $1 million property.
Another important point to note when talking about the LTV ratio is that the LTV is accessed based on the value of the property, and not necessarily the property’s final purchase price.
This means if you apply for a home loan for a residential property in Singapore, the current market value or the property purchase price, whichever is lower, will be taken into account.
For example, say you are purchasing a property that the seller prices at $1.2 million, whereas the official valuation price is only $1 million. In this scenario, your maximum loan amount is still only $750,000, as it will be based on the valuation price. If you still want to go ahead and buy the property, you will have to pay the difference ($450,000) in cash.
This is one reason why the valuation of your property is so important, and why you may want to go to different banks to get different valuations.
LTV can be calculated by simply dividing the loan amount by the appraised price of the property.
Here’s the formula:
LTV Ratio = (Loan Amount / Appraised Price of Asset) x 100%
For example, if the approved loan amount is $500,000, which is to be used for purchasing a $1 million condo, your LTV will be 50% ($500,000 / $1,000,000 x 100%)
The LTV ratio is the most common metric taken into consideration by banks and lenders to determine the size of the home loan in question. It helps them assess the lending risk before approving the loan.
Typically, a borrower with lower LTV is theoretically less likely to default on their loan whereas a higher LTV ratio is considered riskier.
Regardless of whether you are buying your first, second or nth property, the LTV ratio will apply every time you take up a loan to finance your property purchase.
Your LTV ratio or limit will help determine how much downpayment you need to pay upfront in hard cash and/or CPF OA savings.
The maximum LTV limit for an HDB Concessionary Loan is capped at 80%. This means you will only have to pay 20% in downpayment, which could be from your CPF OA account or cash, or a mix of both.
Please note that there is no minimum amount that you must pay in cash unlike a bank loan. HDB loan is only available for BTO, Sale of Balance Flat, Re-offer of Balance Flat, and resale flat purchases.
On the other hand, for a bank loan, the maximum LTV ratio is 75% for the first loan (assuming no outstanding home loans). From the remaining 25%, 5% must be paid in cash while the other 20% can be paid from a mix of both cash and your CPF OA funds.
One important thing that every homebuyer must bear in mind is that not everyone can automatically qualify for the maximum LTV ratio. Neither the bank nor the Housing & Development Board is under any kind of obligation to grant you the maximum LTV limit.
If you have outstanding loans when applying for a new home loan, your LTV ratio will continue to decrease depending on whether it is your second property, third property and so on.
As a general rule, the higher the LTV ratio, the better from the borrower’s perspective. A higher LTV ratio denotes lesser upfront down payment.
Your financial obligation when buying a home isn’t just limited to a down payment and you must also take into account the not-so-obvious extra costs, such as property tax, stamp duties, legal fees, maintenance fees, etc. when buying a home.
That is why most people look for the maximum LTV ratio possible when applying for home loans, which means the larger portion of the price of the house will be covered by the loan and they will have a pay a lesser downpayment.
This will help minimise the immediate strain on their cash flow or financial reserves.
Ideally, the best LTV ratio would be the maximum that is offered by the lender – be it HDB or bank. It would be 80% for HDB loans and 75% for bank housing loans.
However, in some situations, a high LTV ratio might not favour the borrower. In case of foreclosure by the lender or default by the borrower, a higher LTV ratio limits the chances of proceeds of sales to cover up the outstanding principal and accrued interest.
This means if the lender has to foreclose on the loan or homeowners find themselves unable to make their loan repayments, a lower LTV ratio materialises as a saver!
So whether you will be better off with a higher or lower LTV will actually depend on whether you prefer smaller monthly payments or opt for a smaller downpayment when purchasing a property.
The following tips can help you increase your loan quantum and subsequently your LTV (maximum to 75%). Ultimately, it depends on the lender’s policies and other metrics like TDSR and MSR set by the MAS.
If you already have an outstanding home loan when applying for a new one, your LTV ratio will decrease with each subsequent property.
On the second property purchase, it can fall to 45% and even 35% on the third and subsequent property. If you do not fit into the maximum age (65 years) and loan tenure (>30) criteria, it can go down to 25% (or 15% for the third and subsequent property).
This is one reason why it is always recommended to pay off your mortgage on the existing property if you are thinking of retaining it before buying the next property.
No doubt, it is going to take time, especially if you have a limited cash flow, but strategies like limiting your expenses, generating passive income, or withdrawing some of your financial investment might help.
|Minimum Cash Downpayment
|For Individual Borrowers
|75% or 55%*
|5% (for LTV of 75%); 10% (for LTV of 55%)
|45% or 25%*
|3rd & onwards
|35% or 15%*
*LTV limit if loan tenure exceeds 30 years
If you have an outstanding home loan but you are intending to sell or are in process of selling your previous home, then you will usually be subject to the same LTV cap if you do not have the exercised Option To Purchase for sale from your buyer.
However, there is a way around this if you’re buying an HDB property, (including executive condominiums) as long as the Minimum Occupation Period (MOP) is fulfilled.
When you purchase such an HDB property, you need to sign a document committing to sell your existing property within six months. If you can provide a copy of this document to the bank, they can treat it as if you don’t have an outstanding home loan.
A mortgage broker, which is essentially a mortgage consultant in Singapore, can settle this kind of administrative issue for you at no cost.
Just because a bank is ready to lend you doesn’t necessarily mean you are eligible to be given the full loan quantum.
The Total Debt Servicing Ratio (TDSR) calculates how much you can borrow from the bank. It refers to the portion of a borrower’s gross monthly income spent towards paying back the debt obligations every month, including the loan being applied for.
To be eligible for a home loan in Singapore, you must meet the requirement of 55% TDSR. This is the maximum permitted limit whether you are taking up an HDB loan or bank loan.
For instance, if you have a gross monthly income of $10,000, then your monthly debt obligations must not exceed $5,500 (55% of $10,000). If it does, you won’t qualify for the loan.
Hence, if you don’t meet the minimum TDSR requirement, right now might not be the best time of thinking to purchase a property or you should look for a more affordable property.
Meanwhile, you can also try lowering your TDSR by paying off debts like credit card bills on time and/or paying back a significant portion of your debts such as car loan, student loan, renovation loan, etc. before applying for a home loan.
A single borrower with little outstanding debts may also have more chances of qualifying for a home loan.
Alternatively, you may stretch the loan tenure to meet the TDSR requirement if you don’t want to lower the loan amount.
As per MAS guidelines, if the loan tenure goes beyond 30 years or the loan period exceeds the borrower’s age of 65, then the LTV limit will go down as per the table shown in point 1.
While established banks in Singapore are the first choice for getting a home mortgage loan, they have diverse eligibility requirements and take some time to scrutinize loan applications for approval.
But there exist other non-banking institutions that can offer higher LTV with fewer lending regulations.
Note that some non-banking financial institutions may grant home loans to those with lower credit scores or even to discharged bankrupts without having to wait for five to seven years after the official discharge.
Sometimes regular banks may not accept a property valuation considering it too high according to their evaluation standards. However, non-banking financial institutions might accept such a property valuation.
Another way to get the optimal LTV ratio is to bargain down the price of a house to match the valuation, or to get a bank that accepts a higher valuation. Your property agent is there to help with the former, and a home loan mortgage broker can help with the latter.
The only compromise you make when choosing a non-banking lender is typically a higher interest rate, which can vary from lender to lender as well as borrower to borrower.
Your credit score depends on a range of factors, such as how promptly you repay your loans, how much you currently owe, and how many open credit accounts you have.
Those who have an unfortunate history of late payments and defaults on loans are given a poor credit rating. Both the bank and HDB will check your creditworthiness before approving your loan.
Having a poor credit rating might be flagged as a credit risk. In such scenarios, banks may opt to offer you a lower LTV ratio than the permitted limit. For instance, due to a bad credit score, the bank might decide on offering an LTV of 60% only for the first housing loan instead of the maximum 75%.
In general, a credit score of below BB—which can happen if you have received a warning letter for late payment—can result in a lower LTV ratio. It’s ultimately up to the bank or HDB’s credit officer to decide how much or how little they think it’s safe to lend you.
It’s best to pay off your debts responsibly and close unused credit lines at least 4 months before your loan application. Making a habit of prompt repayments will also help to secure the highest LTV.
At the end of the day, the loan amount that will be granted to you is still at the bank or HDB’s discretion.
But if you understand how LTV works, it can certainly prove helpful in financial planning, comparing home loan rates and ultimately maximising the loan quantum granted.
While banks are quite stringent when it comes to following these government-enforced requirements on LTV limits, a good home loan specialist can still help to argue your case. Such a service would be complementary to you, at any rate, so be sure to contact us if you need help.
The relationship between US Fed interest rate hikes and home loans in Singapore is complex but...
Deep dive into mature and non-mature HDB estates and understand the differences between them
Beyond the property purchase price, don’t overlook these upfront costs...