Taking out a loan is one of the options Singaporeans can consider to finance their car or home. But they can’t borrow whatever amount they need. The Singaporean government has put a limit to how much financing a borrower can get. And it is called the loan to value (LTV) ratio.
The Loan to Value (LTV) ratio is used by lenders to determine how much risk they’re taking on. And whether they’ll approve or deny it. This ratio compares the amount of loan you want to borrow with the appraised value of the car or property. A higher LTV ratio means higher risks.
What Is The LTV Ratio?
First, let’s understand what LTV means.
The loan to value ratio or LTV ratio is used to assess the size of a loan. For example, you have an LTV ratio of 70%. This means you owe 70% of your car or property price. So a borrower with lower LTV is considered less likely to default on their loan.
That said, it is also used by banks and other lenders to assess the lending risk before approving your loan. High LTV ratios are considered high-risk loans. This ratio is implemented to safeguard against borrowing an amount that is beyond an individual’s capacity.
The loan to value ratio is one of the many factors considered when assessing car and home loans. Other factors include:
- Credit score
- Income available for monthly payments
- The condition or quality of the property or car you’re buying
How To Calculate LTV?
Calculating the LTV ratio is easy. You only have to divide the amount of the loan by the appraised car or property value.
Here’s the formula: Loan Amount/Asset Price = Loan To Value (LTV) Ratio
For example, you want to buy a property at a fair market price of $200,000. If you’re approved for a $140,000 loan, your LTV will be 70%.
Note: The loan amount may include additional charges and fees that the lender will let borrowers finance. For example, borrowers may choose to finance the filing fees instead of paying upfront. These additional charges will contribute to the loan amount. So it will increase your LTV ratio.
As previously stated, lenders use the LTV ratios to determine the level of risk they undertake. The higher your ratio, the more money the lender gives you. This increases the risk they’re taking.
If you have a high LTV ratio, it means:
- You’ll find it challenging to get approved for home or car loans
- You might pay higher interest rates.
- You might need to pay extra fees, such as insurance
How does LTV affect interest rates?
Banks and other lenders set higher interest rates on high-risk loans. This means that borrowers with low LTV are charged with lower interest rates than those with higher LTV.
Why? Because high LTV means more risk to the lender.
That said, knowing your LTV ratio prepares you for a car or home purchase. This percentage will help determine the type of loan you can avail of and what your interest rate will be.
LTV For Home Loans
Housing loans are an excellent financing option for individuals wanting to purchase their dream property. And the LTV ratio is the most common factor considered to determine the size of a housing loan before it is approved.
For HDB Concessionary Loan, the maximum LTV limit is 90%. While bank loans consider a maximum of 75% LTV. The sweet spot with home loans is close to 80% or lower.
Why do you need to know the maximum LTV?
Because they will help you determine how much down payment you’ll need to pay. And how expensive of a property you can afford.
But there are several factors to take into account to determine the LTV ceiling for your home loan. One of which is the number of housing loans you have.
Here’s an overview of the LTV limits for home loan borrowers in Singapore. You can find additional details about the rules of new housing loans on the Monetary Authority of Singapore website.
|Outstanding housing loans||LTV limit||Minimum cash down payment|
|None||75% or 55%|| |
|One||45% or 25%||25%|
|Two||35% or 15%||25%|
From the table above, you can see that a lower LTV ratio means paying more down payment. This means more cash upfront. But this actually helps you save money in the long run. Since you’re starting with a smaller loan balance, you’ll be paying less interest throughout your loan tenure.
LTV For Car Loans
Buying a car in Singapore is very expensive. That’s why many drivers look to car loans for financing. And while you may want to get the highest loan amount allowed, the Singaporean government implemented strict rules and limitation. That said, loan to value ratio is a relevant factor to consider.
The Monetary Authority of Singapore (MAS) placed a limit to how much an individual can borrow for new or used car loans based on maximum LTV limits. This was to encourage financial prudence in individuals as well as car dealers.
The limits are based on the open market value of the vehicle. Please refer to the table below:
|Open market value of motor vehicle||Maximum LTV||Maximum loan tenure|
|Less than or equal to $20,000||70%||7 years|
|More than $20,000||60%||7 years|
Borrowers need to understand that the LTV ratio works differently for car loans. Vehicles lose value over time, unlike properties that increase in value.
This means that a higher LTV is very risky for a car loan borrower. Because as the car depreciates, the market value will also drop. Then there will be a huge difference between the car value and the outstanding loan balance.
This must be avoided because selling your vehicle won’t cover the loan’s outstanding balance. If this happens, you might find yourself in a sticky situation. That said, avoid having a high LTV ratio. Choose a car that is within your means.
How To Lower Your LTV
The main factors that impact LTV ratios are the down payment, sales price, and the appraised value of the property.
But the two variables you need to focus on are the loan amount and the value of the asset. Remember the formula?
Loan Amount/Asset Price = Loan To Value (LTV) Ratio
So here’s how you can get the lowest LTV ratio:
- Make a higher down payment: Whether you’re applying for a car or home loan, saving for a higher down payment will lower your LTV ratio. As a result, it will also help you get better interest rates. Although this means paying more cash upfront, it will lead to greater savings in the long run.
- Choose a car or property with a lower purchase price: If you can’t afford to make a higher down payment or you’re on a strict budget, the next option is to choose a less expensive asset. This will lower your LTV ratio. And will help you get your preferred loan option. For instance, you can purchase a home that’s a little older. Or a used vehicle so you can use your current savings to make a higher down payment.
Another factor that will affect your LTV ratio and interest rate:
- Credit Score: If you have a history of late payments. Or have defaulted on loans before, this will result in a bad credit rating. Banks and other lenders will see you as a credit risk. So they will offer a lower LTV limit than the allowable maximum LTV. That said, improve your credit rating by paying your debts on time, consolidating debts, and closing unused credit lines.
So before applying for a loan, find out the market value of the car or house you want to buy. You can get a certified appraiser to evaluate the asset. In fact, when applying for a loan, an appraisal will also be one of the requirements by lenders.
Lastly, remember the equation above. You already know the variables needed to get your LTV ratio. You can make changes to get a lower LTV. Finding an asset with a lower market value or paying a higher down payment will improve your ratio.
The loan to value ratio is one of the many factors considered during loan application. The lower your LTV, the better your chances of getting approved. It also increases your chances of getting a lower interest rate as well as the loan option you want.
That said, understand how to calculate your LTV. And find ways to lower it, such as by paying a higher down payment or choosing a less expensive asset.
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