You will be able to explain how the loan-to-value limit sets the minimum downpayment you need.
Write down three numbers: the price you plan to pay for your next home, your cash savings, and your CPF Ordinary Account balance. With these you can work out the largest loan you could get, the smallest downpayment you could pay, and how much of that downpayment must be cash, all before you speak to a bank or HDB. This module works out the bank's sum before you ask, starting with the rule that ties the loan to the home's value.
Three rules decide how much you can borrow. The first is the loan-to-value limit (LTV limit), the largest loan a lender may give as a share of the property's value. The other two, the Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR), cap the loan as a share of your income; lessons 4.2 and 4.3 cover them. Your real borrowing limit is whichever of the three gives the lowest loan.
MAS, the Monetary Authority of Singapore, sets the LTV limits for bank loans. HDB sets its own LTV limits for HDB loans. Any part of the price the loan does not cover is your downpayment, so the LTV limit is really a rule about how much of the price you must pay yourself.
Farah and Hakim are buying a resale flat in Bedok. The seller's agent asks how much their loan is approved for, and they cannot answer. They have a rough idea of the monthly payment they can afford, but not how much a bank or HDB would lend or how much of the price they must find themselves. The agent tells them to "just ask the bank".
They agree a price of S$620,000 (an example figure; the 70% limit used below is also invented, not a current MAS or HDB figure). The valuation comes in at S$610,000. The value used for LTV is the lower of the purchase price and the valuation, which matters most for resale flats. If you pay more than the valuation, the loan is still based on the valuation. The amount paid above it is cash over valuation (COV), and it comes out of your own pocket. Lesson 6.2, "Valuation and cash over valuation", explains how valuations are done.
At a 70% LTV limit, their maximum loan is 70% of S$610,000, or S$427,000. Their downpayment on the valuation is S$610,000 - S$427,000 = S$183,000. Their COV is S$620,000 - S$610,000 = S$10,000. In total they pay S$183,000 + S$10,000 = S$193,000 themselves.
Working from the price alone, they would have expected a S$434,000 loan (70% of S$620,000) and a S$186,000 downpayment. The S$7,000 difference only shows up once the valuation is known, and it has to be paid in cash.
For bank loans, MAS requires a minimum part of the downpayment to be paid in cash. The rest can come from your CPF Ordinary Account, subject to CPF rules. COV must be paid in cash. It cannot be paid from your CPF savings or covered by a loan.
Take a minimum cash share of 10% of the valuation. With a bank loan, Farah and Hakim need S$61,000 in cash (10% of S$610,000), plus the S$10,000 COV, so S$71,000 in cash before stamp duty and fees. The other S$122,000 (S$183,000 - S$61,000) could come from their combined Ordinary Accounts, which hold S$150,000.
An HDB loan has no minimum cash share. The whole downpayment can come from CPF if your Ordinary Account has enough when it is due. At the same 70% limit, all S$183,000 could in principle come from their CPF, and only the S$10,000 COV would be cash. Their cash need is S$61,000 lower with an HDB loan, and with S$80,000 in savings, that difference matters a lot to them. The minimum cash share is one of the main differences between the two loans; lesson 5.1, "HDB loan or bank loan", weighs it against the others.
The LTV limit is not the same for everyone. It is lower in two common cases.
The first is when you have, or have had, a housing loan. A second or third housing loan has a lower LTV limit and a larger minimum cash share. This catches upgraders who keep their first home while buying the next; lesson 8.4, "Upgrading or right-sizing in the right order", returns to them.
The second is a long loan. The limit is lower if the tenure goes beyond a set number of years or runs past a set age for the borrowers. For the age test, banks usually use the average age of the borrowers, weighted by income. Stretching the tenure to lower the monthly instalment can shrink the loan you are allowed. Lesson 5.4, "Loan tenure, and paying from cash or CPF", comes back to this.
The property's age matters too. Loans on flats with short remaining leases are limited, as lesson 7.2, "Lease decay: what a shrinking lease does", explains.
MAS publishes the current LTV limits and minimum cash downpayment for bank loans on its website, and HDB publishes the LTV limits for HDB loans. Both have changed many times, usually as part of cooling measures, and will change again, so look them up first. Your HDB Flat Eligibility (HFE) letter, covered in lesson 2.4, gives HDB's loan figure for your own case. Then work through the sum:
Take the lower of the purchase price and the valuation, and multiply it by your LTV limit to get the maximum loan. Subtract the loan from that value to get the downpayment, then add any COV (price minus valuation) to get the total you pay yourself. For a bank loan, apply the minimum cash share to find the cash part of the downpayment, add the COV, and check whether your Ordinary Account balance covers the rest. For an HDB loan, check whether your Ordinary Account will hold enough for the whole downpayment when it is due; the COV is still cash. Check whether a lower LTV applies because of an existing or previous housing loan, a long tenure or high borrower age, or a short remaining lease.
Then do the sum for your own home. In the activity below, write the LTV limit that applies to you, the minimum downpayment on your planned price, and how much of it must be cash.
Write down the LTV limit that applies to you, the minimum downpayment on the price you plan to pay, and how much of it must be cash.
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