How Much Housing Loan Can I Take?
Applying for a mortgage from the HDB or bank can seem like a complex task for a new homeowner. At first, you might be put off by the unfamiliar home loan eligibility terms and calculations.
However, the terms are not that hard to understand. So if you’re wondering “how much housing loan can I take?”, understanding these terms is crucial to securing the right loan amount for your needs.
This article will explain the lending considerations of money lenders in Singapore, and show you how to get the best loan rates.
Loan-To-Value (LTV) Ratio
The LTV ratio refers to the amount a lender is willing to provide against a property’s actual value. For instance, if you have an LTV ratio of 70%, it means that a lender is willing to lend you up to 70% of the property price or value, whichever is lower.
When the resale price of a property exceeds its actual valuation, the difference is known as Cash Over Valuation (COV).
The LTV ratio is not the only factor determining your loan approval success rate, but it plays a crucial role. Therefore, maintaining a fair LTV ratio improves your chances of loan approval.
Lenders are not obliged to offer you the maximum LTV ratio. Banks and HDB will determine your LTV ratio depending on your financial situation.
Maximum LTV Ratio In Singapore
You can use the following formula to calculate LTV: LTV % = (Amount of loan ÷ Appraised value of asset) × 100
However, practically speaking, there are several ways that lenders use to calculate it.
For a HDB loan, the maximum LTV is now 80% as of 30 Sep 2022. The outstanding 20% is usually settled through cash, your CPF Ordinary Account (OA), or both.
The maximum LTV ratio for bank loans is 75%. The outstanding 20% can be settled through cash, your CPF OA, or both, with a 5% minimum to be paid in cash.
Calculating The Maximum LTV Ratio In Singapore
Let’s say that you are looking to purchase a three-bedroom HDB resale flat valued at $500,000 and the seller has set a price of $515,000. Here is how you would go about it:
Cash Over Valuation
As mentioned above, COV is the difference between the price and actual value. Thus: $515,000-$500,000 = $15,000.
Calculating The Housing Mortgage
With the HDB mortgage option, $400,000 (80% of $500,000) is the maximum loan you can get. You must pay the remaining amount using cash, your CPF OA, or both.
The HDB loan will not cover the COV. You will have to pay the $15,000 in cash.
You can borrow $375,000 (75% of $500,000) from the bank.
Then you could use $100,000 from your CPF savings (20% of $500,000). The remaining amount, $25,000 (5% of $500,000), should be paid in cash.
The bank will not cover the COV amount of $15,000. You will need to use your savings to pay it.
Why You Should Lower The LTV Ratio
Equity And Risk
The first reason why lowering your LTV ratio is ideal is because it reveals how much equity you have for your home.
Financially speaking, if your LTV ratio is 75%, you own 25% of your home. Therefore, a much lower LTV lowers the amount of loan you require, improving your loan approval rates.
A higher LTV ratio is not ideal for the lender because it increases the risk it has to take on. For a borrower, it makes the mortgage more expensive.
Lenders reward a low LTV ratio with lower interest rates. Most of them are willing to provide financing at prevailing rates when the risk is low.
A higher LTV ratio invites more scrutiny into your fiscal history, lowering your chances of loan approval.
Private Mortgage Insurance (PMI)
With a high LTV ratio (above 80%), you might have to pay for PMI as you own less of your home. The PMI protects the lender in the event you fail to make your mortgage payments.
The PMI increases your monthly repayments, putting pressure on your finances. A lower LTV ratio eliminates the need for a PMI, allowing you to make your repayments easily.
How To Lower Your LTV Ratio
This can be done by:
Purchasing A Lower-Priced Property
A more affordable property will allow you to settle your housing payments easily using your savings. You will borrow less and repay quickly.
Making A Significant Downpayment
A higher downpayment means that you own a larger percentage of the property. The higher the property investment rate, the lower the LTV ratio.
How Much Mortgage Loan Can You Afford?
Whether you are applying for a bank loan for a condo or a HDB resale flat, the question of how much you can afford to borrow is a crucial question. Lenders can only lend you what you can repay.
Other factors also affect the loan amount, such as:
These include the downpayment, stamp duty, option fee, renovation, legal, and other miscellaneous expenses.
The downpayment is the highest upfront cost. It secures the property by assuring the buyer of your commitment to making the purchase.
A bridging loan or personal savings would help settle your down payment efficiently. You can pay the rest of the housing expenses using your CPF OA savings or proceeds from selling your old property.
These include the monthly mortgage payments, insurance, and maintenance fees.
Keep your monthly payments manageable to avoid late repayments or defaults. Seeking a loan with the cheapest interest rates is an excellent way of managing your monthly expenses.
A loan with a longer loan tenure also helps ensure low interest rates. However, the longer the term, the more you pay in total interest.
In addition, remember that the interest rate could change over the loan tenure. Changes in interest rates could be caused by economic changes or policy.
Thus, you should review the loan agreement carefully before signing it.
Unforeseen events or accidents may also occur sometimes. This necessitates the need for homeowner insurance or fire insurance. You may also need to pay maintenance fees to keep your home spiffy.
Since you may not be able to settle the costs mentioned above using your CPF savings, choosing a home loan with a principal rate you can afford is necessary.
HDB Loan Vs Bank Loan
Here is a quick comparison between the two.
|HDB Loan||Bank Loan|
|LTV Ratio||Up to 80% of the property value or price||Up to 75% of the property value or price|
|Loan Switch||You can switch to a bank loan||You cannot switch to a HDB loan|
|Repayment Period||Can take up to 30 years||Can take up to 30 years for a HDB flat; 35 years for private property|
|Interest Rates||Rates are set at 0.1% above the prevailing CPF rates||Fixed or floating|
|Total Debt Servicing Ratio||Not applicable||55%|
|Mortgage Servicing Ratio||30%||30% (for HDB flats or ECs only)|
|Fees On Early Repayment||No fees charged||May charge a fee|
|Downpayment||20% upfront||It depends on the number of active loans|
Other Factors Lenders In Singapore Consider Before Approving Mortgages
Your Credit Score
All licensed money lenders in Singapore will check your credit history before making a loan offer. This gives them insight into your finances when it comes to loans.
If you are a frequent defaulter, your chances of securing a loan might be meager. Late repayments may also affect your LTV ratio.
Your Debt-To-Income Ratio
In Singapore, lenders look at your monthly debt obligations. The lender is interested in how much of your income goes into loan servicing.
A lower debt-to-income ratio is what lenders like to see, preferably not more than 43%. While some may still lend to you if you have a higher debt-to-income ratio, some may turn you down.
Your Loan Tenure And Age
In Singapore, the LTV ratio is capped at 55% for an HDB flat exceeding 25 years or if a loan tenure plus the borrower’s age exceeds 65 years.
Also, the LTV is capped at 55% for a private property exceeding 30 years or when a loan tenure plus the borrower’s age exceeds 65 years.
This means that if you are currently 35 years old and want to take a private mortgage, you should make total repayments before turning 65 years old if you are to enjoy an LTV of 75%.
Lenders also consider the:
- Condition of the property and its location
- Value of the collateral
- Loan tenure
- Liquid assets
Understanding what lenders consider before applying for a housing loan will save you a lot of time.