A common aspiration among Singaporeans is to upgrade to a private property; or to go from a condo to a landed home. In these instances, a common question is “How much can I afford to borrow?” There are two answers to this question: the first covers the actual financing limits, put in place by the government to prevent over-leveraging. The second answer is based on how much is safe to borrow, based on your financial situation. Let’s look at the two:
Note: The following details are pertinent to bank loans for private properties, and are not relevant to HDB loans for public housing.
The technical answer to “how much can I borrow for a home?”
For private property, there are two main limitations to be aware of:
- Your Loan To Value (LTV) limit, which is the percentage of the property price or value (whichever is lower) that the bank can lend you
- Your Total Debt Servicing Ratio (TDSR), which is the percentage of your income (inclusive of all debts) that can toward paying your monthly home loan
The LTV ratio
The LTV ratio is expressed as a percentage. For the very first bank home loan you take on, for example, the LTV ratio is 75 per cent.
This means the bank can lend you 75 per cent of the property price or value*, whichever is lower. So if you’re buying a new condo with a price of $2 million, the maximum loan amount is usually $1,500,000.
For the second home loan you take, the LTV ratio falls to 45 per cent, and for the third and subsequent home loan, the LTV ratio falls to 35 per cent.
This is the reason you’re advised to finish paying off the home loan for your first property, before you attempt to take on another.
Age and the loan tenure will further impact the LTV
If your loan tenure would extend past the retirement age of 65, or extends beyond 30 years, the LTV will also decrease. In these cases, your LTV is:
- 55 per cent for the first home loan
- 25 per cent for the second home loan
- 15 per cent for the third home loan
In effect, the older you become, the harder it may be to qualify for full financing.
In the case of multiple borrowers, Income Weighted Average Age (IWAA) is used to determine the LTV
It’s common for borrowers with different income levels to jointly purchase a property (e.g., spouses earning different incomes). In these cases, IWAA is used to calculate the collective age.
The formula is:
For example, consider one spouse aged 30, with an income of $8,000 a month. The second spouse is aged 40, with an income of $20,000 per month. The IWAA is:
The collective borrowers’ age thus counts as 37 years old. They can take a home loan with a loan tenure of up to 28 years, while retaining an LTV of 75 per cent (if it’s the first property loan).
If they were to take a loan longer than 28 years, the LTV ratio would drop to 55 per cent.
Banks are not allowed to lend you money for the down payment of your home
This is under MAS Notice 632. If your LTV is 75 per cent of $2 million, for example, the bank cannot further lend you money for the remaining down payment of $500,000.
For the down payment, you’ll have to use at least some cash, and possibly some of your CPF Ordinary Account (if you choose to use it). Here’s how it works:
Assuming a 75 per cent LTV, the first five per cent of your property must be paid in cash. So for a $2 million home, you need at least $100,000 in cash.
The next 20 per cent can be paid in any combination of cash or CPF. So the next $400,000 can be $200,000 cash and $200,000 from your CPF OA, or $100,000 cash and $300,000 from CPF, or any such combination.
(You can use all $400,000 from CPF, with $0 in cash, if you so choose)
If your LTV is lower than the usual 75 per cent, the minimum cash portion of your down payment will also increase:
| LTV limit | Minimum cash down |
| 55% | 10% |
| 45% or 25% | 25% |
| 35% or 15% | 25% |
*In the case of resale properties, the seller’s asking price may not match the actual property valuation. A seller may ask $2 million for a property valued at $1.8 million, for example – the LTV limit be based on $1.8 million. The difference of $200,000 must be covered in cash.
For properties bought direct from a developer (new launch or new construction), there is no discrepancy between price and valuation. The developer’s price is taken to be fair valuation for the property.
The Total Debt Servicing Ratio (TDSR)
The TDSR limit is currently set at 55 per cent. This means your monthly home loan, after including your other debts, cannot exceed 55 per cent of your assessed monthly income.
For example, if your monthly income is $15,000, then your monthly home loan repayment cannot exceed $8,250 per month.
If you have other debt obligations, this will also count toward the TDSR limit. So if you have an additional car loan of $3,000 per month, your monthly home loan repayment is effectively capped at $5,250 per month.
This is the reason you’re advised to pay off outstanding loans, up to 12 months before attempting to apply for a mortgage.
Note that, for the purposes of calculating your TDSR limit, the bank will always use a simulated interest rate of four per cent per annum. This is regardless of whether your actual interest rate would be lower. This is to ensure you can cope with any sudden rises in the interest rate.
A haircut is applied to variable income, for the purposes of TDSR
If you have a variable source of income, such as:
- Rental income
- Commissions from sales jobs
- Income from stock dividends
Or other factors like self-employment, your income counts as 30 per cent lower for the TDSR framework. If you earn $10,000 in commissions every month, for example, you would count as earning only $7,000 per month.
What happens if you bust the TDSR ratio?
You need to make a bigger down payment, until the monthly repayment falls to acceptable TDSR limits. For example:
You earn $10,000 a month, so your TDSR limit is $5,500.
You want a loan amount of $1.5 million to buy a property. Over a 25-year loan tenure, at the simulated four per cent per annum, your monthly loan amount is $7,917.55.
If you can lower the loan amount to around $1.05 million, the monthly loan repayment would fall to roughly $5,500, which meets your TDSR limit.
However, this means borrowing $450,000 less – you will need to cover this additional amount in your down payment.
By knowing your TDSR and LTV limits, you can effectively budget for a home that you can afford – or set a savings target for your desired home.
But there’s a second answer to the question of affordability
Depending on your financial circumstances, it may not be right to take on a home loan that absorbs 55 per cent of your monthly income.
As a rule of prudence, many financial planners would advise keeping the loan amount to just 30 per cent of your monthly income. This provides sufficient leeway for other savings and investments, rather than just putting all your funds into a single property.
Likewise, it may not be advisable to take on a loan unless you have emergency savings. It’s best to ensure you can service the mortgage for at least six months, in the event you lose your income.
The required savings may be higher for those in riskier positions – such as the self-employed, or those who lack full insurance coverage (e.g., due to pre-existing conditions).
As such, we’d advise that you consult a financial expert on what’s “affordable” for your situation first. Worry about meeting the technical requirements of the loan later.
Do tell us about your dream property and how you aim to save up for it, in the comments below. You can also contact us if you have questions about the article, and follow us for stories on how some single-digit millionaires handle their properties.
