We depend on home loans to realise our property dreams, but there is a limit to how much financing we can obtain. This is because the Singapore government has put in place a tight loan-to-value (LTV) ratio that defines the maximum amount property buyers can borrow, whether the loan is from HDB or a bank.
As long as you're taking out a bank mortgage for your property purchase, you'll need to fork out a percentage of the purchase price in CASH from your own pocket as downpayment, even if you have a large pool of CPF savings. For buying a $1 million property, that would mean having to pay $100,000 cash (10% of the purchase price) as part of your minimum downpayment if you have no outstanding home loan.
And if you have an existing home loan and you're taking another one, your LTV ratio for the new loan changes drastically: your loan amount will be limited to less than half the purchase price whilst you are required to fork out up to 25% of the total purchase price in cold, hard cash. So, depending on advice given from their agents or financial advisors, buyers may opt to pay off an outstanding home loan before buying another property.
In this Guide, we'll help you understand Loan-to-Value (LTV) ratio for each scenario so you can estimate accurately the budget for your property and plan your next property purchase, whether your're a first-timer or an investor.
What Is A Loan-To-Value Ratio?
Let's first go back to basics. The loan-to-value ratio, or LTV ratio, is the amount that you are allowed to borrow to finance your home. For instance, an LTV ratio of 90% means that you can borrow up to 90% of your property value or purchase price, whichever is lower.
In other words, if you pay more for a resale property than the amount of its HDB/bank valuation, that Cash Over Value (COV) amount must be paid in cash.
LTV ratios are implemented as a safeguard against over-leveraging by borrowers. If you’re trying to decide between an HDB loan and a bank loan, read this article to know the differences between the two.
Note that for new launches (e.g. BTOs, condominiums), the LTV ratio will always take reference from the purchase price.
LTV Ratio: HDB Loan Vs Bank Loan
For HDB Concessionary Loans, which are only available for BTO, SBF, ROF and resale flat purchases, the maximum Loan-to-Value ratio is 90%. The remaining amount can be paid by cash, from available savings in your CPF Ordinary Account (CPF-OA), or a mix of both. There is no minimum cash component.
For a bank loan, the maximum LTV ratio is capped at of 75% LTV for the first loan (i.e. no outstanding home loans). Of the remaining 25%, 5% must be paid in cash. The remaining 20% can be paid using a combination of cash or your CPF-OA savings.
The below infographic gives an overview of the latest updated LTV ratio for buying property in Singapore. Take note that the LTV ratio is also subject to loan tenure, as well as the age of the borrower upon the completion of the tenure.
Other Reasons Why You Could Be Denied The Full LTV
It’s important to note that HDB/banks do not have an obligation to loan you the full LTV. They can opt to approve a lower LTV limit, or reject your application outright in the following circumstances:
The Remaining Lease Of The Property Is Too Low
Leasehold properties with 30-40 years left on their lease may incur a LTV ratio of 60%. The reason: banks feel that properties with dwindling lease constitute a less satisfactory collateral because of lowering market value towards the end of a lease.
You may also find that you cannot use your CPF funds to pay for such properties.
(There are special cases whereby properties are purchased through monthly payments, or still obtaining a loan despite the age of the property. These are usually cases whereby the buyer has managed to negotiate a private contract with the seller via a law firm. Alternatively, it may be a special loan by a private bank to a wealthy buyer - who also has a good credit score.)
The Location Is Poor
Based on the location and state of your property, the LTV cap can be lowered significantly. Properties that are based abroad tend to get lower LTV limits. Properties located in a red-light district may also merit a lower LTV ratio.
The lender may check for lawsuits against properties too. Properties that are too run down or have major defects are also reasons to merit a lower LTV ratio.
Your Age And Loan Tenure Is Too High
As illustrated by the infographic above, if the loan tenure on your property purchase extends past 65 years of age, the LTV ratio will be capped. And as long as the loan tenure exceeds 30 years, the LTV will be similarly capped.
If you’re thinking of taking out a home loan at 35, you have to repay your full amount before you turn 65 in order to enjoy a higher LTV ratio. This is why some buyers prefer to buy their second property as soon as they save up enough for one.
Your Credit Score Is Bad
If you have a history of late payments and defaults on loans, you might be flagged as a credit risk. Banks may choose to offer you a lower LTV than the allowable limit, such as 60% instead of 75% for a 1st bank loan.
There are many things that can affect your credit score, such as:
- Bill Payment History
- Paying off your bills (e.g. credit card bills) on time will contribute to a better credit score
- Level of Debt
- You should not use expend than 30% of your credit card limit
- Credit History Age
- Having an older credit account shows that you have plenty of experience handling credit
- Types of Credit
- Having various types of credit is better, as it shows that you have experience handling them.
- Number of Credit Inquiries
- Inquiring about your credit too many times can damage your credit score.
If you think you have a less than perfect credit score, don’t worry, here are some ways for you to improve it.
To get more guides like this, check out PropertyGuru Guides.
Source: PropertyGuru (10 Oct 2019)