LTV: What It Is & What You Need To Know
The Loan-To-Value (LTV) for residential properties in Singapore was first introduced way back in 1996, with the main aim of tackling speculation in the real estate market.
Since then, there had been numerous revisions to the LTV, with the latest version set on 6 July 2018, along with the increase in ABSD rates.
How the LTV works
The purpose of the LTV is to prevent-overleveraging by restricting the amount of loan that may be granted to purchasers of properties, which contributes to the cooling effect on the real estate market.
It works in two ways:
- Reducing monthly instalments with a smaller loan quantum
- Discourage speculation by demanding a higher upfront commitment through bigger downpayments
The latest round of LTV adjustments can be summarized with the following table by Martin Heck:
If this table seems rather intimidating to you, it is perfectly understandable, since most people would feel the same way looking at it for the first time.
Simply put, a first-time borrower aged 32 years old taking a 30-year loan tenure (which ends at age 62 years old), will need a cash downpayment of 5% and qualify for a loan up to 75% of the property’s price OR valuation, whichever is lower.
Unlike what our Math/Science teachers love to stress…you do not need to memorise the table. (Whew!)
In case you are wondering, taking a HDB loan for a HDB/DBSS (No ECs unfortunately) flat will entitle you to a 90% LTV, albeit to a maximum loan tenure of 25 years.
But taking a bank loan for the same unit still subjects you to the above values in the LTV table, at maximum loan tenure of 25 years too. Unless you choose to go for a 55% LTV, which allows you to extend up to 30 years loan.
If the table format just doesn’t work for you, our friends from propertyguru has a nice illustration too!
This might just work better for the visual learners!
Impact of LTV on the Market
For those looking to acquire multiple residential properties in the future (because who doesn’t wanna be a landlord enjoying passive income?), you may have to pay more attention to this section.
While we used to be able to borrow up to a loan of 90% in the mid-2000s, this isn’t the case anymore.
Back in the good old days, it’ll just take a total f $300,000 to own 3 properties at $1 million each.
Unfortunately, due to the cooling measures, the same plan will require you to be a lot more well-heeled.
In fact, it would demand almost 5 times more upfront capital at $1.45 million for any individual to own the same 3 properties.
And that is BEFORE any of the stamp duties payable.
Now how many of us would have that amount of funds sitting in our bank account to be deployed that way?
As such, more detailed and deliberate planning with a trusted real estate consultant has be conducted before the same landlord dreams can be achievable, in order to better optimize the funds available to the individual.
How does the LTV affect us mere mortals?
For the majority of us already holding on to either a Condo or HDB, the thought of upgrading to a newer and better residential property, then renting out our 1st property for some passive rental income has probably crossed our minds at a certain point in time.
After all, the idea of having a seamless transition shifting house only once from the first to the next, and the first property paying for our newer one sure sounds lucrative isn’t it?
Unfortunately again, while not impossible, this is where the LTV gangs up with the TDSR and ABSD to ensure most of us would wanna think twice about this proposal.
First, we are restricted to a TDSR of 60% regardless of the number of concurrent loans.
Second, we are only allowed a 45% loan eligibility from the bank, provided we clear the TDSR framework.
Then, we are struck by the 12% ABSD for Singaporeans’ second property.
To do this, we would require an upfront 55% Cash/CPF + 12% ABSD to have such a dream come true.
Which means an upfront $670,000 before Buyer’s Stamp Duty (oh gosh..) for a $1 million second property.
Of course, there is a slightly less painful way for this move ahead, but an upfront of that amount would still be required.
Now that explains why we have families selling off their 1st property in advance, then either renting houses or going back to their parents’ place to stay for the short to medium term to allow their condo dreams to come alive!
While the guidelines have been stated clearly by the Monetary Authority of Singapore (MAS), there may be a few exceptions by the banks when it comes to loan approval.
1) Credit Rating If you often make late payments to your debt obligations, your credit rating by the banks may be affected, which in turn possibly resulting in a lower loan eligibility 2) Remaining Lease of Property Residential properties with very short leases such as 40 years and below may not get the full 75% LTV by banks, due to the inherent market risks involved with holding on to such units.
3) Location Certain properties in areas such as the red-light district may not be granted the full LTV by banks too, due to the perceived risks as assessed by the bankers. Same goes to properties with unpleasant histories or frequent structural issues.
“So What’s Next For Me?”
Cooling measures such as the LTV often work closely together with others like the TDSR and ABSD.
It is imperative for us to take into account all the different government measures and restrictions, as well as perform the necessary calculations carefully to safeguard our own interests.
Before jumping head-on to your next desired step, do consider seeking professional help for updates on the latest market measures and changes to prevent catching ourselves in a financial sinkhole.