With endless online resources to help you find your next dream home, the only obstacle in your way is understanding what you can afford. The fact that you are reading this now, tells us you have great plans in mind, and that you are probably planning your path to success.

Are you that young ambitious couple hoping to pounce on that heavily discounted opportunity you have been eyeing? Or are you that investor looking to find attractive property for medium-term capital gains?

In this article, we at Redbrick Mortgage Advisory will help you navigate the basics of local regulations to get you closer to owning that dream property.

Should I really get a housing loan?

Your home is quite possibly the most expensive asset that you will ever purchase and should provide you and your family with a sense of comfort and security. We recommend that you take the time to clearly establish financial goals for yourself and your family. Your home should not be a burden, but an enabler to help you reach that next step in life! It is important to understand the benefits and risks involved in taking up your next housing loan, so that you can be prepared in any economic situation.  

How much debt can you take on?

It is less common for someone to pay for their entire property in cash, and most of the property will be paid for with debt. While Redbrick Mortgage Advisors can help you with securing your loan, you should consider the maximum loan that you can take on your property.

This is determined by the Loan-to-Value (LTV) limit, which is set by the Monetary Authority of Singapore (MAS). As of today, bank loan LTV limits stand at 75% for individuals without existing housing loans, and if the loan tenure does not exceed 30 years or the borrower’s age of 65. The remaining 25% will constitute cash or CPF, of which, 5% must be paid in cash.

The introduction of this regulation aims to protect Singaporeans from over-leveraging. This achieves the goal of preventing Singaporeans from taking on unnecessarily large amounts of debt, and cools down property prices so that they remain affordable.

So, what does the 75% LTV Limit refer to exactly?

An important detail is that the 75% LTV limit is based on the value of the property or the purchase price, whichever is lower. It does not always refer to the purchase price negotiated between the buyer and seller.

For example, the property is valued at $1.0 million, but is listed at $1.2 million. Your LTV limit then will be $750,000. The rest of the amount will have to be paid with cash and CPF. CPF cannot be used to pay for Cash Over Valuation (COV) and there is a maximum CPF usage at 20% of valuation.

Be wary of this, as paying a premium for the property may not mean you will be able to take on a loan of similar proportion, and this may result in you having to fork out more cash, or from your CPF savings.

You may also wish to consider any idiosyncratic risks associated with your mortgage products (we can help walk you through that), as some products may expose you more to the fluctuations of interest rates. It is important that you speak to your mortgage broker about your financial situation so that you can find the right products to maximise opportunities in periods of low-interest rates, while remaining defensive. 

Can everyone apply for a bank loan to cover 75% LTV?

Well, not really. That would be contingent on your relationship with the bank, and whether you have a good credit score. Typically, a poor credit score would result in a lower LTV, which would hence result in a smaller loan. Furthermore, your age may restrict you from taking on large loans. If the loan tenure on the property exceeds the borrower’s age of 65, the LTV limit will be reduced. Apart from cooling the property market, such measures also ensure that Singaporeans remain prudent with the usage of leverage.

In essence, you will have to balance the loan principle with the tenure, which will dictate the affordability of your monthly payments.

That’s great! I’m on my way to max out my housing loans now!

Wait! One other thing you would need to consider is the Total Debt Servicing Ratio (TDSR). Loans require repayments, and while you could technically maximise the LTV ratios, the TDSR determines the maximum percentage of the borrower’s gross monthly income that can be used for debt repayments. This is dependent on your salary and any other streams of income that you may have.

Currently, the TDSR is 60% of one’s gross monthly income, which means that ALL monthly debt repayments should not exceed this threshold. So, churn those numbers before getting that car loan!

Couldn’t I stretch out my loan tenure to reduce my monthly loan repayments?

Yes, you could, but remember, interest rates are still in effect! This could compound over time and stretching your loan tenure out may expose you to other risks that you should be aware of. Taking on an unnecessarily long loan tenure may seem attractive due to lower repayments. We caution against rushing into this decision due to the uncertainties of the future, such as housing prices, job security, and changing financial priorities.  

Furthermore, if you find yourself in a good financial position after a number of years and wish to repay the outstanding loan balance, you may be faced with pre-payment charges.

We encourage you to reach out to us if you wish to have a more personalised overview of the opportunities available to you. At the end of the day, why should you be paying more for the same property?

Bryan Seto
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