How much can i borrow for a home

A comfortable and spacious home is vital to any family’s happiness, and Singapore’s property price is not exactly the friendliest. Regardless if you’re a first-time home buyer or upgrading your flat, you will definitely need a home loan in Singapore. You’ll need to calculate and plan your finances carefully for your home purchase.

If you’re like most Singaporeans looking to settle down, “how much can I borrow for a home loan?” is the first question you type on Google.

As the price of a house is large, even a tiny change in percentage for loan rates can cost a huge sum. Luckily, this guide makes it simple to find out how much you can borrow so you can start dreaming about your perfect home. Here’s how much you can borrow for your home loan.

How Much Can I Borrow for My Home Loan?

If you take a bank loan, the maximum amount you can borrow is 75% of your property’s price. Conversely, an HDB loan can cover up to 90% of that price.

A bank loan allows you to purchase private properties, not just HDBs. As banks use floating interest rates for their home loans, the total interest charged will be lower. Homeowners will also be debt-free faster.

HDB loans are better if you’re short on cash because they allow you to cover the entire downpayment using your CPF account. Of course, that advance payment is 15% lower.
The main disadvantage with HDB loans is stricter eligibility conditions according to your income and familial status.

What Is a Loan-To-Value (LTV) Ratio?

The Loan-To-Value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The phrase is most commonly used in real estate transactions, where the asset is usually a piece of property.

Here is an example of LTV. The LTV ratio is calculated by dividing the loan amount by the property’s appraised value. For example, if a borrower takes out a $100,000 loan to purchase a home valued at $200,000, the LTV ratio would be 50%.

Why is that number significant?

The LTV ratio is important to lenders because it represents the amount of risk they take.

• A high LTV ratio means that the loan amount is close to the value of the property, so if the borrower defaults on the loan, the lender may not be able to recover their losses.
• A low LTV ratio indicates that the lender has a good amount of equity in the property, so they are less likely to lose money if the borrower defaults.

For this reason, lenders typically prefer loans with low LTV ratios and may require borrowers to put down a larger down payment.

How Does LTV Ratio Work?

To calculate the LTV ratio, divide the loan amount by the property’s value. For example, if you take out a $100,000 loan on a property worth $150,000, your LTV ratio would be 66%.

In general, most lenders will require a lower LTV ratio for more expensive properties or for loans that are considered to be high-risk. For example, a lender may require a 50% LTV ratio if your property is very old or your income is low. This means the lender would only be willing to lend up to 50% of the property’s value.

By contrast, if your case is deemed low-risk, the maximum bank loan for an HDB apartment can reach 75%. If you’re taking an HDB loan, you can borrow up to 90% of that flat’s value.

The bottom line is that the LTV ratio is an essential tool that lenders use to assess risk. When applying for a loan, it is crucial to understand how this ratio works and its impact on your application.

What Is Total Debt Servicing Ratio (TDSR)?

The Total Debt Servicing Ratio (TDSR) measures borrowers’ ability to service their debt obligations. That’s why this value is one of Singapore’s top loan eligibility conditions. The TSDR can be used to assess the affordability of a new loan, and it is typically used by lenders when deciding whether to extend credit.

• A high TDSR indicates that the borrower has a high debt burden and may have difficulty making their monthly payments.
• A low TSDR, on the other hand, indicates that the borrower has a low debt burden and is more likely to be able to make their monthly payments.

How do you calculate your TDSR in Singapore? You simply divide your gross monthly income by your monthly debt payments.

TDSR in Singapore is currently capped at 60% of your monthly gross income. Here’s what that means:

• If your gross monthly income is $5,000, the maximum amount of debt you can service is $3,000.
• Therefore, your total monthly payments for all debts (including a housing loan in Singapore) should not exceed $3,000.

However, there are some additional factors included in your TDSR calculation. The stress test is one of these. In this scenario, banks will do a simulation that increases your interest rate artificially. The reason is to see how you will cope when the market rate rises.

If your current home loan interest rate is 2.5% p.a., banks may use a stress test of 3.5% p.a. (or even higher) to calculate your TDSR. This test is meant to ensure that even if rates go up in future, you’ll still be able to afford your monthly repayments.

Another factor affecting TDSR is your income’s periodicity. That’s bad news for self-employed people with variable earnings. In this case, your bank might reduce the income used for the TDSR calculation by 30%.

But there are still some good news!

Applying with your spouse takes into account both your incomes. Therefore, your joint application’s income-weighted average age (IWAA) might be higher.

What Is the Difference Between TSDR and MSR?

Everyone knows that when it comes to buying a house, the two most important considerations are price and location.

But there’s another essential factor to consider: your debt-to-income ratio.

This ratio, commonly abbreviated as DTI, is a determining factor in whether or not you’ll be approved for a housing loan in Singapore. It also dictates how much loan you can get from the bank.

There are two main types of DTI ratios:

• The total debt servicing ratio (TSDR): Maximum of 60% in Singapore
• The mortgage servicing ratio (MSR): Maximum of 30% in Singapore

The TSDR includes all your monthly debt payments, while the MSR only includes your mortgage payments. Both ratios are calculated by dividing your monthly debt payments by your monthly income. A higher DTI ratio indicates a greater risk of default, so lenders will typically only approve loans for borrowers with a TSDR of 45% or less.

For borrowers with an MSR of 20% or less, on the other hand, lenders are usually more willing to take on the risk.

Pro tip: Use a loan calculator to sort out your finances before applying for a home loan. That’s how you can determine the sum you’re eligible for more precisely and prepare for the downpayment.

Factors that Will Lower Your LTV Ratio

A lower LTV ratio means being eligible for less money from the bank. Here are some potential issues that could lead to that outcome:

1.Previous Unpaid Home Loans

One unpaid home loan lowers your LTV ratio to a maximum of 45%. But that’s not all; 50% of your 55% downpayment must be in cash. That means 27.5% of your prospective property’s total price must be in cash.

If you have two previous outstanding home loans, the maximum LTV limit you’re eligible for is 35%. That means a whopping cash advance of 65%. And that’s only if you meet these two conditions:

• Loan tenure is below 30 years.
• Your age at the end of the term is below 65.

Not meeting these requirements will lower your LTV even more.

2. The Remaining Lease

Properties with fewer than 35 years left on the lease may not qualify for bank loans unless you’ve negotiated a private contract with the seller.

Properties with 36-40 years left on the lease have an LTV capped at 60%. The “good” news is you can disburse 15% of the 40% advance payment using your CPF. If you do the math, that’s just 6% of the apartment’s price.

3. Location and State of the Property

The closer your property is to the Central Business District (CBD), the higher the LTV ratio you’ll be eligible for. That’s because such properties are deemed to have a higher resale value. If you’re buying a shiny EC in Orchard Road and your finances are in ship shape, you’re in luck.

The state of your property also matters. You may borrow up to 75% of its value if it’s a newly completed apartment and you have no other home loans. But if it’s an old resale flat, the maximum LTV will drop significantly.

4. Your Age and Loan Tenure

Your age and loan tenure also influence how much loan you can get from the bank.

As of 6 July 2018, the LTV for private homes will be limited to 55% if the loan duration reaches 30 years or beyond.

If you take out a mortgage for an HDB flat with a loan tenure of over 25 years, the LTV will be capped at 55%. The same thing will happen if you don’t repay your loan before reaching 65 years of age.

5. Your Credit Score

Your credit score may also drop your LTV. If you have a poor repayment history, your LTV could drop to as low as 40%.

To avoid this, keep up with your monthly loan repayments. Also, keep your credit card balances low and don’t max out your cards.

In the unfortunate situation where your credit score is low, learn how to improve your credit score fast here.

Are You Ready For Your Home Loan?

Applying for your home loan can be daunting. Afterall, it is a legal contract that is going to last up to 25 years. To get more information on property and loans in Singapore, speak to us at Credit Thirty3. Our experienced finance assistants will be happy to help you.

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