The Dark Side of Loan-to-Value (LTV) ratio
Once again, this is an article that all existing home-owners and aspiring home-buyers should never miss. Many Singaporeans tend to focus on the interest rates offered in the market when shopping for home loans. However, the biggest nightmare for home-owners is not the rising interest rates. After all, even if the interest rate of your home loan did spike overnight, the monthly installment amount is not going to be catastrophically high. Instead, the scary thing about home loan is when you are faced with margin call due to the loan-to-value (LTV) ratio.
What is margin call? What is loan-to-value (LTV)? Why do they matter and how could they possibly lead to your financial downfall? Once again, I am putting a disclaimer that this article is not meant to be a financial advice. I am sharing this article based on my home-buying experiences. If you have any doubts, please seek advice from your property agent or financial adviser.
If you are using HDB loan to finance your property, then you can sleep well as you would not be subjected to margin calls. This is because HDB loan is a form of concessionary loan granted to Singapore citizens. Unlike banks, HDB would not force home-owners to top up the loan difference in the event that the value of the HDB flat plummeted. So how does margin call or loan-to-value (LTV) works?
Generally, there are two main criteria banks used to assess your loan eligibility and they are the Total Debt Servicing Ration (TDSR) and loan-to-value (LTV).
TDSR refers to the ratio of combined total monthly debt obligations (including car loan, credit debt, student loan, existing home loan(s), etc) to the total monthly gross income. Under this framework, the monthly repayment installments for all property loans and other debt obligations are not to exceed a TDSR of 60%. The aim of this policy is to encourage prudent borrowing by households.
Many Singaporeans tend to confuse TDSR with Mortgage Servicing Ratio (MSR). Both TDSR and MSR are rules implemented by Monetary Authority of Singapore (MAS) in recent years to tighten measures on property investments and curb excessive borrowings among residents.
MSR is applicable only to HDB and Executive Condominium owners and it caps the Mortgage Servicing Ratio (MSR) for housing loans granted by financial institutions at 30% of a borrower’s gross monthly income. Private residential owners are not subjected to this rule. In addition, the main difference between TDSR and MSR is that the former looks at the overall debt obligations of a borrower in relation to his income while the latter limits the amount which you can borrow from the bank to purchase HDB flats or Executive Condominiums.
Assuming that you are not overly leveraged and that meeting the TDSR or MSR is not an issue, then the next factor that will affect the grant of your housing loan is the loan-to-value ratio, which is the amount of loan taken out on a property relative to its value expressed as a percentage.
According to MAS’ Moneysense website, the tenure of the loan and the age at which you applied for housing loan play a part in your loan application:
80% LTV
If you are purchasing an HDB flat, have no outstanding housing loan and if:
• the tenure does not exceed 25 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
If you are purchasing a private property, have no outstanding housing loan and if:
• the tenure does not exceed 30 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
60% LTV
If you are purchasing an HDB flat, have no outstanding housing loan and if:
• the tenure exceeds 25 years (up to a maximum of 30 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
If you are purchasing a private property, have no outstanding housing loan and if:
• the tenure exceeds 30 years (up to a maximum of 35 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
50% LTV
If you are purchasing an HDB flat, have 1 existing outstanding housing loan and if:
• the tenure does not exceed 25 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
If you are purchasing a private property, have 1 existing outstanding housing loan and if:
• the tenure does not exceed 30 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
30% LTV
If you are purchasing an HDB flat, have 1 existing outstanding housing loan and if:
• the tenure exceeds 25 years (up to a maximum of 30 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
If you are purchasing a private property, have 1 existing outstanding housing loan and if:
• the tenure exceeds 30 years (up to a maximum of 35 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
40% LTV
If you are purchasing an HDB flat, have 2 or more existing outstanding housing loans and if:
• the tenure does not exceed 25 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
If you are purchasing a private property, have 2 or more existing outstanding housing loans and if:
• the tenure does not exceed 30 years; and
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
20% LTV
If you are purchasing an HDB flat, have 2 or more existing outstanding housing loans and if:
• the tenure exceeds 25 years (up to a maximum of 30 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
If you are purchasing a private property, have 2 or more existing outstanding housing loans and if:
• the tenure exceeds 30 years (up to a maximum of 35 years); or
• the sum of the loan tenure and the age of the borrower at the time of applying for the loan extends beyond retirement age of 65 years.
Margin call
Arising from the loan-to-value ratio, banks usually insert clauses in the terms and conditions to allow them to make a margin call when the value of the property plunged. This is likely to happen during financial crisis and the banks would want to limit the risk of loan defaults.
Assuming that you bought a property worth $1 million with LTV of 80%. The loan amount would be $800,000. After a few years of servicing the loan, let’s assume you still owe the bank $750,000. Assuming that there is a major economic downturn and the value of your property plummeted to $900,000. The LTV would result in the loan amount that you can borrow to change to $720,000. In this case, you might need to top up the difference of $30,000, either with cash or CPF savings.
During the Great Financial Crisis, there were reports of expatriates facing margin calls from their bankers on their loans taken out for their Singapore properties. These happened when the value of their properties dropped significantly. So there is likelihood of your banker invoking margin calls and demanding you to do cash top up to balance the LTV ratio.
However, based on my experiences, my property agent had shared that generally local banks are very reluctant to do margin calls. This is because with thousand of bank loans, performing valuation on each property would take up tremendous resources. Furthermore, invoking margin calls would only damage existing customer relationships and the banks would stand to lose the mortgage interests to be earned from the loan.
In my own opinion, foreign banks would likely to target those high risk customers taking up huge loan for high-end luxury homes. Thus, to avoid suffering the fate of receiving margin calls from your banker, make sure that your personal finance is in order. Where possible, try to limit the amount of borrowing. For example, you may want to consider taking a LTV of 60% or lessor even though you may qualify for a LTV of 80%. In doing so, during market crisis, even if your property value dropped, the decline would not go below the outstanding loan balance.
Read my other articles on property:
- Freehold or Leasehold property?
- Negative HDB sales
- Wealth destruction from CPF Accrued Interest
- Devastating HDB Loan and CPF Accrued Interest
- CPF’s Home Protection Scheme (HPS)
- The Dark Side of CPF Housing Withdrawal Limit
Magically yours,
SG Wealth Builder
