Loan-To-Value Ratio limits (LTV)
How much can you borrow while buying a property? Learn all the essential factors about Loan-To-Value limits in Singapore.
Are you planning on buying property in Singapore? Congratulations! You’re one step away from your dream home.But as we all know, buying property can be an expensive affair that most people can’t afford.
It often involves spending vast sums of money, which is often too burdensome on your finances. Unless you’re a billionaire tycoon, the chances of paying the entire sum of money for your new home are very slim.
That’s why most people with an average monthly income often have to seek housing loans to make the purchase. Now, we know what you’re thinking, just take a loan for the entire amount and pay it back eventually, right?
Well, unfortunately for you, there is a limitation to how much you can borrow in your loan.
This limitation is called the Loan-to-value ratio and determines the maximum loan amount allowed for an individual. It applies to all banks, financial institutions, and other private house loan providers.
So why does the LTV limit exist? Well, just like the Additional buyer’s stamp duty (ABSD), the LTV is implemented by the Non-Licensed Housing Developers to balance the property market.
In this article, we will be explaining everything there is to know regarding the Loan-to-value ratio.
What are the maximum amounts applicable for loans? What are the LTV limits for various financial institutions? How to calculate the LTV ratio?
These are just some of the questions we aim to answer in this article.
What Is a Loan-to-Value Ratio (LTV)?
The loan-to-value ratio is the maximum amount you can borrow from a financial institution to purchase your home. This is implemented by the Monetary Authority of Singapore to safeguard the public housing market from becoming oversaturated.
The limitation helps protect against instances of over-leveraging and ensures a sustainable property market.
To explain, an LTV ratio of 80 % means that you can only borrow up to 80 % of the purchase price or property value(Whatever is lower). The LTV ratio applies to any loans taken for residential property purchases, be it an HBD flat or other private properties.
The purchase price will determine the LTV ratio in the case of new residential properties such as new launch condos.
Loan-to-Value Ratios (LTV) in Singapore
In Singapore, HBD housing loans have a maximum LTV ratio of 85 % of the purchase price or property value. This effectively allows you to borrow a loan amount of up to 85 % of the total property price.
The remaining 15 % has to be paid in down payments in cash or from your CPF PA savings. Note that there is no minimum cash downpayment required.
Let’s say that the price of a new building which you want to purchase is $ 700,000. Having an LTV ratio of 85 % means that you can loan up to $ 595,000, while you will have to pay a downpayment of $ 105,000.
The LTV ratio for bank loans is a bit more complicated compared to HBD loans.
In this scenario, the maximum LTV ratio is 75 % for the first home loan, provided you don’t have any outstanding home loans. The remaining amount can be paid using cash downpayment or through your CPF-OA savings. Additionally, 5 % of the remaining amount must be paid in cash only.
If you’re taking a bank loan for your second home, then the LTV ratio is limited to 45%. What’s more, that number is reduced to 25 % if the loan tenure is more than 30 years or if it extends your 65th birthday.
Why You May Not Always Qualify for the Maximum LTV
While securing a loan is crucial for purchasing your home, there might be instances where your loan is rejected. Alternatively, you might receive a smaller loan than what you asked for.
Let us discuss some of the reasons that contribute to a loan application being rejected or lowered.
When the remaining lease of the property is too low
If a leasehold property has less than 40 years remaining on the lease, receiving an 85 % LTV is slim. This is because properties in the second half of their lease period tend to depreciate in value. As a result, it does not match the minimum level of collateral that a bank could find satisfactory.
When the location or condition of the property is not desirable
The LTV limit for your loan may be lowered depending on the location and condition of the property. This is valid when the property is defective or located in a poor locality.
Alternatively, properties based in foreign countries may also qualify for a lower LTV limit.
When you’re too old, or the loan tenure is too high.
If the tenure of the loan exceeds your 65th birthday, chances are the LTV ratio will be lowered.
Similarly, loans exceeding 30 years also have the LTV ratio decreased.
When you’re credit score is terrible.
Being late for your loan payments may lower your credit score, resulting in a lower LTV ratio.
Moreover, you will not qualify for any loan if your monthly debt obligations are so high that it exceeds the debt servicing ratio.
This would make it financially impossible for you to repay the loan on time, making you a risk.
LTV limit for HDB housing loans
The LTV limit for HBD loans used to be 90 %, but it has recently been lowered to 85 %.
The downpayment amount in this scenario is 15 %.
LTV limit for bank loans
LTV limit for the first bank loan is 75 % for a 30-year or less loan tenure period. The Downpayment is 25 %, with a 5 % minimum cash downpayment.
In the case of loan tenures exceeding 30 years, the LTV limit is 55 %. The downpayment here will be 45 %, with a minimum cash downpayment of 10 %. This also applies to loans that precede your 65th birthday.
The LTV limit for your second bank loan will be 45 % for a loan tenure of fewer than 30 years. The downpayment is 55 %, with a minimum cash downpayment of 25 %. If the loan tenure exceeds 30 years or crosses your 65th birthday, the LTV is lowered to 25 % with a downpayment of 75 %.
LTV limit for your third loan will be capped at 35 % for loan tenures of 30 years or less. If the tenure exceeds 30 years or crosses your 65th birthday, the LTV will be 15 %.
What if I have an outstanding housing loan but intend to sell my HDB flat to upgrade?
If you have an outstanding loan but are planning to sell your HBD flat, then the LTV will not be affected by the outstanding loan. For all intents and purposes, you will be considered a new person with no outstanding home loans.
This means that the loan you are applying for, which technically should be your second loan, will be considered your first loan.
Selling your HBD flat means that the proceeds will be reinvested in the resale markets. The property will no longer belong to you and will be listed once again in the real estate market. This cancels out your outstanding housing loans, and therefore, you are treated as a fresh applicant.
So to conclude, the maximum loan amount that is available to you will not be affected by the previous home loan at all. Therefore, the maximum LTV ratio possible will be 85 %, which is the general rate for first-time loans.
However, you will have to submit the required paperwork such as a copy of the approval letter. You can collect this from the lender of the outstanding loan, which in this case is HBD. Moreover, completing the sale of the HBD flat will also require a copy of the letter of undertaking. This is generally referred to as a letter of intent.
What is the LTV for the second property?
Choosing to take a second home loan while still paying for the first one will reduce the maximum possible LTV for the loan. What’s more, there will be an increase in the minimum cash downpayment, 25 % to be precise.
The LTV for your second property is rated at 45 % for a loan tenure of 30-years or less. However, if the loan tenure crosses 30 years, the LTV will be further lowered down to 25 %. This is also valid if the duration of the loan passes your 65th birthday, i.e if you become more than 65 years of age during the loan tenure.
For example, let’s say you have a current loan tenure of 20 to 25 years, however, you will be 65 years old by the time you reach the 22nd year of the tenure. In this situation, the LTV will be capped at 25 % and not the usual rate of 45 %.
Moreover, the value of a property can be decreased if a loan has been used against it. This is applicable in the case of mortgage equity withdrawal which happens when the equity from the home’s value is removed by using a loan against its market value.
Loan-To-Value (LTV) Applies To Our Property’s Value, Not Necessarily Our Purchase Price
LTV is always measured by the property’s market valuation, not the exact purchasing price. For example, let’s say you bought a house for $ 1 million; however, the value decreased to $ 900,000 later on.
So, LTV will be determined by the current property value, i.e $ 900,000 and not the purchase price of $ 1 million which you spent. Therefore, assuming that the LTV limit is at 75 %, the bank can only loan you 75 % of $ 900,000, which is $ 675,000.
So you will still need to pay the remaining amount of $ 1 million- $ 675,000 = $ 325,000. This remaining amount of $ 325,000 will be payable via cash downpayment or using your CPF fund.
Higher Loan-To-Value (LTV) Limit For HDB Housing Loan
HBD housing loans provide a higher LTV ratio when compared to bank loans. The LTV limit for HBD loans is a whopping 85 %, with a 15 % downpayment.
This is significantly greater than that of bank loans, which is 75 % for 30 years or less loan tenure, with a 5 % downpayment, and, 55 % for loan period of 30 years or more, or if the loan passes your 65th birthday. The minimum cash downpayment here is 10 %.
How to Calculate LTV
The LTV ratio can be calculated using this simple formula.
Loan Amount ÷ Asset Price = Loan-to-Value (LTV) Ratio
So, for example, let’s say the loan amount is $ 200,000 and the property cost is $ 500,000.
Then by using the above formula, we can conclude that the LTV ratio is
$ 200,000 ÷ $ 500,000 = 40 %
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