Before purchasing a new residence, whether it is your first home or you have owned several in the past, every buyer must understand the loan-to-value ratio and how to determine the amount they can borrow for this purchase. This is referred to as the loan-to-value ratio and plays a role in how much money will be needed at the time of purchase. This initial cash outlay concerns many potential buyers, and minimizing the down payment is important for this reason. How do you go about determining the loan-to-value ratio?

The Loan-To-Value (LTV) Ratio

Lenders refer to the amount a borrower may obtain for a mortgage as the loan-to-value ratio. For instance, an LTV ratio of 80 percent means the borrower may secure up to 80 percent of the property's value or price. You can easily use an online tool like LTV Calculator, Easily Calculate Loan-to-Value, Simon Conn to quickly assess the actual amount of the mortgage loan that you will need for your purchase.
The lender determines the lower of the two and uses this figure when calculating the loan-to-value ratio. When the price on the property is higher than the asset's value, lenders refer to this as the Cash Over Valuation (COV). This is of importance when you go to obtain a home loan in Singapore.

The maximum LTV permitted depends on the type of loan selected and the lender. The difference must then be paid in cash, using the CPF Ordinary Account (CPF OA), or a combination of the two, and some lenders require a portion of the down payment to be paid in cash. Buyers must understand loan-to-value ratios remain the same regardless of the type of property being purchased. The lender decides the limit they consider acceptable.

How This Works

Imagine finding a four-bedroom property you love. The lender values the property at $400,000, but the owner put an asking price of $420,000. The difference between the two figures is what is referred to as the Cash Over Valuation (COV). If the lender's loan-to-value ratio stands at 90 percent, the buyer can only borrow up to $360,000. To make up the difference, the borrower needs to come up with the other ten percent of the value assessed by the lender or $40,000 and pay these funds using either cash or the CPF OA. The remaining $20,000 that makes up the cash over valuation must be paid in cash. Under regulations established by the Monetary Authority of Singapore or MAS, borrowers are prohibited from securing a bank loan for the down payment.

Lender's Discretion

Additionally, borrowers must understand lenders aren't required to provide the maximum loan-to-value for a customer. They retain the right to lower this figure in situations where they feel the maximum amount wouldn't be appropriate. There are numerous situations where the lender may choose to do this.

For example, individuals who already have outstanding home loans might find the lender lowers this amount to ensure the borrower doesn't overextend themselves. The location of the property or its current state plays a role in the LTV offered, and the same holds true when it comes to the buyer's age and the length of the loan. Finally, a person's credit score impacts the loan-to-value ratio. These factors play a role in how much a lender is willing to extend to a buyer looking to purchase a property.

Before purchasing a home, make certain you understand how much you can borrow and why. This helps you determine which property to obtain and which loan to use when doing so. The goal is to find the best deal for your situation. With some time and effort on your part, you can do so with each real estate transaction you complete.