Personal Finance

# What Is Loan To Value? Understanding LTV Ratio In Singapore’s Property Market

September 1, 2023

In a world where we rely on mortgages and loans, LTV is essential for lenders when considering the terms to give a potential borrower. So, let’s start by understanding what is loan to value.

**Definition And Mortgage Lending Significance**

The loan-to-value (LTV) ratio is an evaluative metric creditors, and financial institutions utilise to analyse the level of lending risk that comes with a mortgage application before approval. Loans with high loan-to-value ratios are often seen as high-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.

**High LTV Implications**

In cases of LTV, a loan will be subject to high interest if the mortgage application receives approval. Moreover, it is worth noting that a loan with a high loan-to-value ratio may need the borrower’s acquisition of mortgage insurance to mitigate the lending institution’s potential risk.

The insurance in question is Private Mortgage Insurance (PMI).

**Key Takeaways For Singaporean Homebuyers**

Here are three key takeaways you should be aware of:

- Perception: Lenders often perceive lower loan-to-value ratios (LTVs) as more favourable, necessitating borrowers to provide more significant initial down payments, which will act as housing loan security.
- LTV impact on interest rates: Most lenders offer home equity and mortgage applicants the best interest rate when the LTV ratio is equal to or less than 80%.
- Mortgage insurance requirements: Borrowers with more excellent loan-to-value ratios see an increase in the cost of mortgages.

**Calculating The Loan-To-Value Ratio For Singapore Properties**

Potential homebuyers should use the following LTV calculation formula.

LTV ratio = Mortgage Amount divided by Appraised Property Value.

**Example Of LTV Calculation**

If an individual purchases a residential property with an appraised value of $100,000 and subsequently provides a down payment of $10,000, the remaining amount would be $90,000.

The outcome of this calculation yields a loan-to-value ratio of 90%, specifically represented as 90,000 divided by 100,000.

**Loan-To-Value Ratio In Singapore’s Property Market**

Determining a loan-to-value ratio is an essential aspect of the mortgage underwriting process. This financial instrument finds use in various scenarios, such as acquiring a residential property, converting an existing mortgage into a different loan, or utilising accumulated equity in a real estate asset.

Lenders evaluate the loan-to-value ratio to gauge the extent of risk they assume throughout the mortgage underwriting role.

Whenever borrowers apply for an advance equal to or close to the appraised value of the collateral (thus resulting in a higher loan-to-value ratio), creditors consider a higher probability of loan default. This phenomenon can be due to the limited equity accumulation in the property.

Consequently, in bankruptcy, the lending institution may encounter challenges in selling the property at a price sufficient to fully satisfy the remaining mortgage debt while still generating a surplus from the sale.

**Factors Impacting LTV Ratios And Down Payment Importance**

The primary determinants influencing loan-to-value (LTV) ratios include the magnitude of the initial payment, the sales price, property cooling measures, government regulations, and the appraised worth of a given property.

One can make the attainment of the lowest loan-to-value (LTV) ratio easier by creating a more extensive first payment and a lesser purchase price.

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**How Singaporean Lenders Use LTV**

The loan-to-value ratio is merely one determinant in assessing the qualification for obtaining a line of credit, a home equity loan, or a mortgage. Nevertheless, it can significantly impact the interest that a borrower might obtain.

Home loan interest influences most lenders to provide home equity and mortgage borrowers with the most favourable interest rate available when their loan-to-value ratio is equal to or less than 80%.

**LTV And Its Impact On The Requirement For Mortgage Insurance In Singapore**

While a more excellent loan-to-value ratio does not necessarily result in the exclusion of applicants from mortgage approval, it is essential to note that a spike in the proportion of loan-to-value may lead to a corresponding rise in the loan’s interest rate.

For instance, a 95% LTV ratio applicant might qualify for mortgage approval. Nevertheless, it is worth noting that the interest rate available to borrowers with a loan-to-value ratio over 75% may elevate due to a complete percentage point.

In instances where the loan-to-value ratio exceeds 80%, it may be necessary for the borrower to get private mortgage insurance (PMI). This can result in an annual increase in the overall loan amount ranging from 0.5% to 1%.

As an illustration, Private Mortgage Insurance at a rate of 1% on a mortgage worth $100,000 would result in an incremental payment of $1,000 annually (equivalent to $83.33 per month) towards the overall sum.

One must pay the Private Mortgage Insurance until the Loan-to-Value ratio reaches or falls below 80%. The loan-to-value ratio declines as the borrower gradually repays the funding, and the residential property’s worth appreciates with time.

**Standard LTV Thresholds Set By Singaporean Financial Institutions**

The likelihood of loan approval and the favourable interest rate increase as the LTV ratio decreases. The possibility of having to pay for Private Mortgage Insurance (PMI) as an applicant also decreases.

Although there is no legal mandate for lenders in Singapore to enforce an 80% loan-to-value ratio to exclude clients from incurring the supplementary expense of private mortgage insurance, virtually all lending institutions follow this approach.

Borrowers with high incomes, low debt levels, or sizable investment portfolios may occasionally qualify for workarounds to this rule.

**Different Approaches To Loan-To-Value Ratio Regulations**

Various loan kinds may possess distinct regulations concerning the criteria for loan-to-value ratios.

**LTV For HDB Loan Considerations In Singapore**

The maximum HDB flat LVT in Singapore cannot exceed 80%. This implies that the contribution for the deposit is set at 20% of the total amount and can come from either the individual’s cash or CPF OA account or a combination of both.

It is essential to acknowledge that no obligatory minimum cash payment requirement exists in contrast to a bank loan. The Housing and Development Board loan is exclusively accessible for acquiring Build-To-Order flats, Sale of Balance Flats, Re-offer of Balance Flats, and resale flats.

**LTV Considerations For Bank Loan Variations In Singapore**

In the context of a bank loan, the highest possible loan-to-value ratio stands at 75% for the initial loan, assuming there are no existing home loans. Out of the balance of 25%, the applicant must settle 5% in cash and pay the remaining 20% using a combination of money and funds from the Central Provident Fund Ordinary Account.

Prospective homebuyers must acknowledge that the maximum loan-to-value ratio is only inherently attainable for some individuals. The bank and the HDB are not responsible for providing applicants with the maximum loan-to-value limit.

When individuals seek new home loans with outstanding debts, their loan-to-value ratio will progressively decline with each subsequent property acquisition.

**Considerations For Loans For A Private Condominium LVT In Singapore**

The loan-to-value ratio is a prevalent statistic financial institutions, and lenders utilise to assess the magnitude of the mortgage under consideration. Assessing the lending risk before loan approval is beneficial in aiding financial institutions in their decision-making process.

Generally, an applicant with a lower loan-to-value ratio is less prone to loan default. In comparison, a larger LTV ratio usually carries a more significant risk.

Irrespective of whether an individual is purchasing their initial, subsequent, or many properties, the Loan-to-Value ratio will be applicable whenever they secure a loan to fund their property acquisition.

The Loan-to-Value ratio or restriction determines the initial payment amount necessary in cash and Central Provident Fund Ordinary Account savings.

**Singapore Government Schemes And Their Influence On LTV**

The maximum LTV for a bank loan was 80% until July 2018. However, a reduction of 75% is in place as part of the property cooling efforts in 2018.

In light of the recent declaration on the property cooling measures for the year 2022, it is noteworthy that the loan-to-value (LTV) ratio for bank loans remains constant at 75%.

**Difference Between LTV And CLTV**

The combined LTV (CLTV) definition is the percentage for every secured borrowing on an asset to the market value of the acquisition. At the same time, the LTV ratio analyses the effect of one mortgage loan when acquiring a property. All liens on the property are present, not only the first mortgage used to calculate LTV.

Lenders use the CLTV ratio to assess a borrower’s creditworthiness if multiple loans finance a property purchase. Lenders typically provide loans to borrowers with excellent credit and CLTV levels of 80% or higher. Since CLTV is a more comprehensive indicator, primary lenders are typically more lenient.

Let’s take a deeper look at the distinction. We only consider the principal mortgage balance when calculating the LTV proportion. So, if the home’s value is $200,000 and the principal mortgage balance is $100,000, the loan-to-value ratio is 50%.

Consider the scenario of multiple loan refinancing, such as a $30,000-second mortgage and a $20,000 home equity line of credit. When added together, the ratio of loan amount to value skyrockets to 75% ($100,000 + $20,000 + $30,000 divided by $200,000).

If the borrower defaults and repossession ensues, these factors become paramount.

**FAQs On Loan-To-Value For Singaporean Homebuyers**

**What Makes A Strong LTV?**

Most lenders commonly employ an LTV ratio of 80% as the benchmark for a favourable threshold. Anything lower than this threshold is even more advantageous. Please note that an increase in loan-to-value ratio beyond 80% can result in higher borrowing expenses or potential loan rejection for borrowers.

**What Are The Drawbacks Of The Loan-To-Value Ratio?**

One significant limitation of the data provided by a Loan-to-Value ratio is its exclusive consideration of the principal mortgage held by a homeowner. This is while neglecting to incorporate additional financial commitments of the applicant, like home equity loans and a second mortgage, inside its computations.

Hence, the CLTV ratio is a comprehensive metric in assessing a borrower’s capacity to fulfil repayment obligations for a residential mortgage.

**What An LTV Of 70% Implies**

An LTV ratio of 70% (0.70) signifies that the loan amount is equivalent to 70% of the asset’s value. In the context of a mortgage, it indicates that the applicant made a deposit of 30% and is seeking financing for the remaining amount.

As an illustration, consider a home valued at $500,000 with a loan-to-value ratio of 70%. In this scenario, the initial deposit would amount to $150,000, while the remaining $350,000 would be from a mortgage.

**LTV Calculation Methodology**

To determine the LTV ratio, you divide the loan amount by the appraised value of the property or asset that acts as security for the loan. In the context of a mortgage, that calculation refers to dividing the mortgage sum by the property value.

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**Conclusion **

Ultimately, the decision about the sum of the loan an applicant receives remains within the authority of the bank or the Housing and Development Board. Understanding what is loan to value and its concept can be advantageous in financial planning, facilitating the comparison of house loan rates and eventually optimising the amount of loan issued.

Although banks demonstrate a high level of adherence to government regulations on loan-to-value limits, the assistance of a competent home loan expert can effectively advocate on your behalf. This service is a complement to your needs.