The question most prospective home buyers ask is “how much can I borrow for a home loan?” as they get started on their homeownership journey.
Along the way, they are likely to ask other questions such as “How much loan can I get from the bank?” or “How much can I loan from HDB?”
But while these are important questions, it is also crucial to know how much a bank or money lender may be willing to loan you based on your current financial situation.
Some loans borrowers take up end up driving them into financial distress and ruining their finances irredeemably.
Hence, the question of how much you should borrow to buy your home is determined by critical factors such as your expected monthly repayment installments, interest rate, repayment schedule, etc.
With this in mind, you’re likely to source the loan you need rather than look out for lenders that can offer the maximum housing loan in Singapore.
In this article, we’ll help you determine the amount you should borrow by explaining how the loan amount and the tenures are determined
We’ll also look at the amounts that various financial institutions offer, what the loan-to-value ratio means, and how you can access an HDB loan.
Before we delve any further, let’s define these two terms.
Loan amount refers to the amount of money that a lender gives you on credit, while the loan tenure is the length of time it should take you to pay off the loan entirely so long as you stick to the predetermined payment schedule.
Lenders consider a few factors when determining the loan amount to offer you such as your:
1. Gross income: This includes all your income sources, including your salary, business earnings, part-time earnings, child support, alimony, and any other income channels.
2. Credit history: Banks consider your credit score to evaluate your risk as a borrower, while money lenders in Singapore look up a borrower’s credit report on the Moneylenders Credit Bureau (MLCB).
MLCB is a centralised system that collects and stores credit data from all licensed money lenders in Singapore. By looking you up on the MLCB, a money lender can see your borrowing and repayment patterns with other licensed money lenders in Singapore.
3. Front-end ratio: This refers to the ratio of the mortgage you are to get measured against your income. It shows the size of income you can set aside every month to be able to repay your home loan. Ideally, this ratio should not exceed 28% of your gross annual income, although some money lenders will still consider you for the loan at 30% or even 40%.
4. Back-end ratio: This is the ratio of your debt to gross annual income. It shows the percentage of your income you would need to cover all your debts or financial responsibilities such as repaying your student loan, credit card debt, bank loan, child support, alimony and others. Most money lenders prefer that you do not exceed a back-end-ratio of 43%.
The amount issued to you influences the loan tenure directly. Typically, the higher the amount, the longer the repayment period.
In turn, the loan tenure affects the loan’s affordability because it determines the length of time you will be in debt and the overall cost.
Typically, a short assignment leads to high monthly installments, while a longer tenure leads to higher costs in the long run.
Nevertheless, a long tenure is desirable to many because it makes the repayment journey easier. The borrower does not forego much to pay installments, and the loan becomes less burdensome.
Also, if you indicate that you’re looking for a long-tenure loan, you’re likely to be eligible for a high loan amount.
But, to be sure, before you approach a lender, look up an online mortgage calculator in Singapore and use it to evaluate your eligibility and the tenure you’re likely to get for that loan.
Your income and age will also influence your loan tenure.
Middle-aged borrowers in their 30s and 40s may qualify for long-tenure loans, but those nearing the retirement age are advised to shorten their tenures because once retired, their incomes may be reduced or stop altogether.
Lastly, if your income fluctuates, you’re better suited for a long-tenure loan.
An online EMI calculator may help you analyse your income and determine the tenure that would work best for you.
Generally, it’s assumed that prospective home buyers can afford a loan that is two to 2.5 times their annual gross incomes.
So if you earn $80,000 a year for instance, you might be able to pay a $160,000 to $200,000 loan comfortably.
There are also some online housing loan calculators in Singapore into which you can enter your data, after which it helps you determine how much you would qualify for and the possible loan tenure, among other details.
From there, you can determine the type of housing the amount would get you. If it serves your needs, you can start shopping around for a money lender.
The loan-to-value ratio in Singapore, abbreviated as the LTV ratio, is the amount you can borrow for your home purchase.
It is calculated by dividing the amount the lender will issue against the property’s appraised value.
An 80% LTV ratio, for example, means that you can borrow up to 80% of the property price or property value, whichever of the two is the lesser.
So, if your prospective home is appraised at $100,000, with an 80% LTV ratio, the lender will give you $80,000.
Money lenders use the LTV ratio as a measure of the amount of risk they would take in their issuance of a secured loan.
So the LTV ratio will vary depending on the money lender you approach.
LTV is simply the portion of the house value that the downpayment does not cover.
So if you place a 15% downpayment on a loan intended to cover the rest of the costs of your home, the LTV on that loan will be 85%.
The maximum LTV for a resale loan is 85%, while the maximum LTV for a bank loan is 75%.
For example, let’s say you are shopping around for a bank loan for a condo valued at $350,000, but the property seller quotes $375,000.
First, the $25,000 spread between them is called a Cash Over Valuation.
Now, if you seek a loan from the bank, you may get 75% of $350,000, and if you’re seeking an HDB resale loan, you may get up to 85% of $350,000.
But note that neither the bank nor HDB is mandated to issue you this maximum amount. They can lower it if they deem it necessary.
Another critical fact to note is that going by regulations set by the Monetary Authority of Singapore, you cannot pay your downpayment using loan money.
The factors that primarily impact the LTV ratio are:
Other factors that may lower your LTV ratio include:
If you already have been servicing a home loan, the LTV of your second home purchase is capped at 45%.
For half of the remaining 55% downpayment, the borrower pays in cash, and the other half, in CPF Ordinary Account (OA) funds or just cash.
A borrower already servicing two home loans and is taking a third will have his or her LTV capped at 35%.
But note that both of the above LTV ratios are only applicable to loans that have 30 years or less left in tenure.
If the loan term goes beyond the borrower’s age of 65 going forward, or the tenure is longer than 30 years, the LTV may fall.
The location and condition of the home can significantly lower the LTV limit.
For example, if the property is in an undesirable area, located abroad, or is run down with major defects, you will likely get a low LTV.
As of Jul 2018, private property LTVs are capped at 55% for loans whose tenures exceed 30 years or if the sum of the borrower’s age and the loan tenure exceeds 65 years.
Say the LTV for an HDB flat was capped at 55%, and the HDB loan maximum loan tenure was 25 years. But even then, the sum of the borrower’s age and the loan tenure must not exceed 65 years.
So if you apply for a private home loan at 35, to qualify for the 75% LTV, your loan tenure must not exceed 30 years.
But if you already have an outstanding home loan, despite your young age, the LTV may fall to 25%.
If a property has 36 to 40 years left on its lease, the LTV is capped at 60%. You can pay up to 15% of the difference using your CPF.
Properties with a maximum of 35 years on the lease do not qualify for a home loan. You cannot even use your CPF funds, especially for a property with 30 years or less on the lease.
Whenever you apply for a loan, the money lender must check your credit history to assess your ability to repay the loan you’re applying for.
If you have a history of defaults or late payments, the money lender may tag you as a credit risk.
But if the lender still offers you the loan, you may get it at a lower LTV than usual. For example, you may get 60% instead of the typical 75%.
To avoid getting flagged as a credit risk, always pay all your loans on time. Even a loan that you took many years ago could affect you.
An HDB Concessionary Loan, called an HDB loan, is intended for persons looking to own an HDB flat.
It is a special mortgage offered by a government body, targeting low-income households. It has an eligibility cap of $14,000 for couples and $21,000 for an extended family.
So if your household income exceeds the capped amount, you will be redirected to seek credit from banks or licensed money lenders.
With HDB loans, the goal is to assist homeowners by making mortgages affordable to those who may not qualify for bank loans or be able to get them on favourable terms.
Still, HDB itself must exercise prudence in its issuance of loans. Persons with low incomes can only access the lower maximum at most, and vice versa. The kind of HDB flat you can afford depends on your income.
Again, those with part-time incomes or those with odd jobs will have a “haircut” applied to their loan, meaning that HDB only considers 70% of their earnings.
This lowers the amounts they are eligible for.
In terms of requirements, you must:
If you fail to secure a loan from the government-sponsored HDB loan, you may seek it from banks.
The maximum bank loan for a HDB property is 90%, making the purchase process less stressful.
Ultimately, the easier path to take for home buyers in Singapore is to seek the services of a licensed money lender.
Katong Credit is one of the widely known licensed lenders in Singapore.
Besides offering home loans, among other financial products, we take the time to understand their clients’ homeownership goals and assess their financial positions.
We will then advise accordingly, and offer an easier path to home ownership.
Apply for a loan now or visit Katong Credit at 304 Orchard Road, #02-30/31 Lucky Plaza, Singapore 238863. You can also call +65 6291 2210 for more information or to book an appointment.