Loan-to-value (LTV) is basically a notion used to describe the loan amount a mortgage lender is willing to offer you based on the value of the property. When calculating loan to value, It is common practice to replace the property value with the buying price if the buying price is lower than the property value. These circumstances can occur when the seller is in a hurry to sell of his piece of real estate, the property in question had faced foreclosure due to defaults, etc.
Loan to value is the most common factor that a lot of real estate buyers use to decide whether to take up a house loan. The lowest of interest rates is irrelevant if the mortgage lender is not willing to finance your desired loan amount. How are you going to cough up another 10% of property price in cash if a lender offers you 70% loan to value instead of your required 80% loan to value?
Typically an individual in Singapore can borrow up to 80% loan to value on their first mortgage loan. These borrowers can be citizens, foreigners and permanent residents. With recent government intervention, a second mortgage loan is capped at 60% loan to value. This is to keep a lid on property speculation driving up prices artificially high.
An undesirable situation that property investors want to avoid is when the appraised value of a property does not match up to the initial indicative value. As lenders will only offer a house loan based on the lower valuation, the difference has to be covered by the borrower.
An initial property value is at $300,000 and the lender had offered to finance 80% LTV. This comes to $240,000. However, the appraised value comes back at only $280,000. This will result in the lender only providing financing for $224,000. The home buyer has to top up the $16,000 difference from his own pocket or other means.
The home buyer can also consider going to another lender to explore their valuations and offered LTVs. At this point, when you are short of time, it is a good idea to engage the help of a mortgage broker. Brokers keep track of all the available market home loans and have good contacts with many lenders. You can choose to tap on their resources to find an alternative house loan.
The number 1 factor to increase your LTV is your personal income. Whether a mortgage lender is willing to offer you a good home loan always come down to whether you can afford to repay the loan comfortably. No party will want to get into a situation of defaults. So if you cannot qualify for your loan to value limit, you should consider getting a trusted third party to be a third party guarantor for the home loan. This party preferably has a significantly high income.
Also note that your personal financial commitments are taken into consideration when determining your loan to value ratio. You may still end up with a lower LTV limit when you have a high income of $100,000 but has outstanding loans that take up $80,000. Financial commitments that can be taken into consideration are car loans, education loans, credit facilities, personal loans, etc. The best scenario is that you have little financial facilities under you.
Every bank and financial institution have it’s own internal policies of doing business. When it comes to property mortgages, there may be many different classifications for different types of properties. There can be different loan to value limits set on particular property types. These are things that you may not have control over. An example of this is – some banks will not finance 2-room HDB flats.
Lenders always want clients with a proven credit conduct. This can be assessed by analyzing your credit report for the credit bureau. Always be mindful of making prompt payments on your credit facilities especially when you know that you are going to apply for a home loan in the next 6 months. Your credit score as determined by the credit report can greatly affect your loan to value ratio and loan to value limit. Do not miss payments so that you have a satisfactory score.