If you want to buy a house/property in Singapore, chances are you don’t have the entire sum stashed in a savings account – or in a metal biscuit tin.
It is almost 100% that you will need to take a home loan from a bank or a financial institution. To buy a property in Singapore, some of us even go the extra mile to earn passive income.
But did you know that even secured loans that take on collateral have a loan limit?
And that limit is the Loan-to-Value ratio.
The Singapore government imposed this maximum threshold to restrict the funds you can borrow. And that means the LTV influences how much cash you need to have for your down payment. It prevents Singaporeans from taking on too much debt.
Of course, you can also acquit this down payment with your CPF/OA savings, but the point is you still need that sum.
And there’s more: This loan-to-value ratio still applies regardless of how many loans you’ve taken or not before. So, first-timers aren’t spared this condition. With that in mind, let’s see how much that loan-to-value ratio is in Singapore and the difference between bank loans vs HDB loans. Keep reading below!
What Is The Loan-To-Value Ratio (LTV)?
The LTV is the maximum threshold for your house loan. For instance, if you want to get an HDB apartment that costs $500,000, you can borrow:
– Maximum 90% equaling $450,000 through an HDB loan
– Maximum 75% equaling $375,000 through a bank loan
Now here’s an important distinction:
In the previous section, we defined the loan-to-value ratio as a percentage (90% for HDB loans and 75% for bank loans) calculated from either:
– The property value
– The purchase price
Why Do I Need To Know These? Which Costs Does The HDB & Bank Loan Take Into Account?
Let’s consider the same example we started with: that $500,000 flat. This cost represents the property value. Of course, you may buy the same apartment at a lower or higher price. Do note that this cost excludes the money needed for home renovation and the purchase of furniture.
If you pay $475,000 for the apartment – that’s the purchase price. The maximum loan you can get is calculated on that $475,000 purchase price. But what if you pay $525,000 for that flat?
Well, in this case, the maximum loan-to-value ratio is calculated on the $500,000 property value.
So that’s the bad news:
The loan-to-value ratio – aka the maximum sum you can borrow – is always calculated from the lowest figure between property value and purchase price.
So, Why Do These Limits Exist In The First Place?
It’s not to mess with buyers. On the contrary, this measure prevents people who need housing loans from over-leveraging.
Here are some other issues to consider:
If you’re getting a new launch, the loan-to-value ratio will always be calculated from the price you’re actually paying for that property. These new launches can be:
– HDB apartments (BTOs)
– Executive condominiums
– New launch condos
A second consideration regards resale property:
If you purchase this property at a higher cost than the valuation price, the difference between these two amounts is called Cash Over Value (COV).
The bad news is you’ll have to pay this sum using cash only – not your CPF account.
So, if you’re forking out $375,000 for a $350,000 property, the loan-to-value ratio is calculated from that $350,000. That means:
– You have to cover an advance payment of $35,000, and you can use your CPF for that payment.
– You’ll need to pay an extra $25,000 that you get by subtracting the $350,000 valuation price from the $375,000 purchase cost. This $25,000 can only be acquitted in cash.
Loan-to-Value Ratios (LTV) In Singapore: HDB Loans Vs Bank Loans
For couples in Singapore, you would know that there are only two options to buy a house. It is either a HDB loan or a bank loan.
Let’s analyse these financing options in more detail so that you can choose the right solution:
Loan-To-Value Ratio For HDB Loans
First things first: if you’re considering an HDB loan, know that you can only use it for certain purchases, such as:
– BTO flats
– Sale-of-balance flats
– Re-offer of balance flats
– Resale flat purchases
If you pick an HDB loan, your loan-to-value ratio is very advantageous – at a maximum of 90%. That means you can borrow 90% of your property’s purchase price or valuation cost, so there’s only 10% left to cover with an advance payment.
You can acquit this sum using:
1. Cash, or:
2. Money from your CPF Ordinary Account (CPF-OA), or:
3. Both these sources
There’s even better news: You’re not conditioned to make a minimum cash deposit, which means you can pay for the entire down payment using your CPF-OA entirely.
Loan-to-Value Ratio For Bank Loans
Bank housing loans are more versatile than HDB loans because you can use them to pay for HDB homes and other properties. On the downside, they don’t allow you to borrow as much money.
The maximum loan-to-value ratio for a bank housing loan is 75%.
Yes, we’ll get to what that “maximum” means in a sec, and it’s not great – so brace yourself.
But for now, here are the other conditions to remember:
– The minimum down payment you can expect if you choose a bank housing loan is 25%.
– You’ll need to have at least 5% of that amount in cash.
– You can repay the rest of the 20% using cash, your CPF account, or both.
If your loved ones took housing loans before July 2018, they were lucky because their loan-to-value ratio was 80%. However, the government decreased that LTV because property prices and interest rates were sharply increasing. If that trend had continued, it would have produced a destabilising correction later on.
What’s The Loan-To-Value Ratio You Qualify For?
In the previous section, we mentioned that the maximum loan-to-value ratio is 90% for HDB loans and 75% for banks. But the maximum amount doesn’t mean the same thing as the actual amount.
So even though you covet that 90% or 75%, it doesn’t mean you’ll get it.
Banks or the HDB can decide to lend you a lower LTV or even to reject your submission from the get-go.
Here’s why that can happen to you:
1. Lease Tenure, Age, Other Housing Loans
Here are the current rules and maximum loan caps according to the Monetary Authority of Singapore:
|Outstanding housing loans||LTV limit||Minimum cash down payment|
|None||75% or 55%||- 5% (for LTV of 75%)
- 10% (for LTV of 55%)
|1||45% or 25%||25%|
|2 or more||35% or 15%||25%|
So, you’ll qualify for the lower loan-to-value ratio if:
– The tenure is above 30 years (or 25 years for HDB properties).
– You’re over 65 years old.
Let’s consider a few examples so that you can understand better.
Someone is looking to get a housing loan for a $400,000 HDB property:
– The tenure is 24 years, and it’s the buyer’s first purchase. Also, the buyer is 35 years old. In this case, the loan-to-value limit is 75% of $400,000 = $300,000.
– The tenure is 30 years, and it’s the buyer’s second purchase. In this case, the loan-to-value ratio is 25% of $400,000 = $100,000.
– The tenure is 24 years, and it’s the buyer’s first purchase, but that person is 66 years old. In this case, the loan-to-value limit is 55% of $400,000 = $220,000.
So, you’ll obtain a lower loan-to-value ratio if the bank thinks you or your property are too old because:
– Aged properties don’t represent worthy collaterals if you default on your loan.
– Older people.
But, some people can still obtain the higher loan-to-value amount even if they don’t technically qualify if:
– They employed a law firm that helped them to negotiate a private contract with the seller.
– A private bank granted them a special loan because they’re wealthy and have excellent credit histories. For example, a 70-year-old oil magnate worth one billion dollars can obtain that 75% maximum LTV.
– Repay the entire loan amount before you turn 65 years old so that you can get a better loan-to-value ratio.
– Don’t delay purchasing your second HDB property if you have enough money saved up.
2. The Property Is In Poor Condition/At A Low-Rated Location
Condition and location are essential factors for the loan-to-value ratio.
Here’s why: Remember that this LTV represents how much money the bank decides to lend you. But banks always think in terms of the associated risks.
Banks have to prepare for the possibility of loan defaults.
So, in this case, how much money will they get back by reselling your property?
If that flat or home is in a red-light district or otherwise has an inconvenient location, it will value less. The same statement is valid if that property is run-down.
Pro tip: Make sure the property you’re getting doesn’t have any lawsuits that would otherwise lower its value as well.
3. Your Credit Score Is Poor
What happens if your credit score is poor? How will this affect your home loan application?
People with low credit ratings are more likely to default on new loans. So, if the bank deems you a risky customer, they can decide to offer you the lower loan-to-value limit or reject your application altogether.
Alternatively, there are private financial institutions that can lend you a hand with a home loan. Having a place of your own is not that tough with a reliable financial institution like Lending Bee! As one of the six firms piloting a new lending model in Singapore, Lending Bee is confident of meeting your needs.
The Total Debt Servicing Ratio (TDSR) Affects Your Loan Amount Too
Here’s another bad news: Even if you technically qualify for the highest loan-to-value ratio, it doesn’t mean you’ll get that maximum amount.
The Total Debt Servicing Ratio (TDSR) tells you how much money you can borrow based on your income and the previous loan.
So what’s this TDSR?
According to MAS, the TDSR represents how much your monthly income you’re using to repay your loans.
This proportion can’t be over 60%.
So let’s say you qualify for a 90% loan-to-value ratio for a $500,000 HDB property. The tenure is 24 years, and the annual interest rate is 2.5%. That means:
$12,500 in interest per year
– $300,000 total interest for your entire loan tenure
– $800,000 total loan cost
– $2,778 monthly installment
Now let’s say you’re earning a $9,000 gross monthly income.
60% of that income represents $5,400. Since $2,778 is less than $5,400, you qualify for that 90% loan-to-value ratio.
But what if you have a preexisting loan?
Let’s say you’re already forking out $2,700/month to repay a car loan and a business loan. In this case, $2,700 + $2,778 is more than $5,400.
Here are your solutions:
– Choose the lower loan-to-value cap if you want to get the property as soon as possible, and you don’t want to prolong your tenure.
– Wait until you’ve repaid your previous debt to qualify for the higher LTV.
– Prolong your tenure to lower your housing loan’s monthly installments. However, if the loan tenure extends beyond 30 years or your 65’s birthday, the LTV decreases. Another disadvantage with prolonging your loan tenure is that you’ll increase the total costs.
– Clear your credit card debt in order to improve your credit score.
Mortgage Servicing Ratio (MSR) For HDB Flats
Just when you think you’re out of the woods, here comes the Mortgage Servicing Ratio to bring you back. Here’s the deal:
– MSR is the proportion of your income that you have to pay for your property loans.
– MAS decided that a person’s MSR can’t be more than 30% of their gross monthly income.
So, in our previous example, $2.778 represents less than 30% of $9,000. That buyer can obtain the more convenient 90% loan-to-value ratio.
But what if your gross monthly income is only $6,000? In this case, 30% of it represents just $1,800, so you won’t qualify for the 90% LTV.
Loan-to-Value Ratio (LTV) Conclusion
Yes, it is a lot to take in. Here’s a summary to help you remember:
1. The loan-to-value ratio is the maximum sum you can borrow for property financing.
2. The loan-to-value ratio for an HDB loan is a maximum of 90% of the house’s value or the price you’ve purchased it for.
3. The loan-to-value ratio for a bank loan is a maximum of 75% of the house’s value or the price you’ve purchased it for.
4. Several considerations influence the loan-to-value ratio: The house’s lease, location, condition of the property, your current age, your credit rating.
5. The total loan amount for which you qualify also depends on: TSDR, MSR
You have several solutions to get a higher loan-to-value ratio, such as applying jointly with your partner, paying off previous debts with a low interest personal loan, or prolonging your tenure.
But is it always best to get the highest loan-to-value ratio that you qualify for?
If you need a short term loan for an important expense, Lending Bee, one of the top financial institutions in Singapore can help you. Our advanced system allows you to apply via Myinfo in 3 minutes!
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