You will be able to explain how the loan-to-value limit sets your minimum downpayment.
The agent selling the Bedok flat asked Farah and Hakim a question they couldn't answer: "How much is your loan approved for?" They had a rough idea of what they could afford each month, but no idea how much a bank or HDB would actually lend them, or how much of the price they had to find themselves. The agent's suggestion was to "just ask the bank". This module does the bank's sum before you ask.
Three rules decide how much you can borrow. The loan-to-value limit, in this lesson, caps the loan as a share of the home's value. The Mortgage Servicing Ratio and the Total Debt Servicing Ratio, in lessons 4.2 and 4.3, cap it as a share of your income. Your real limit is whichever bites first.
The loan-to-value limit, or LTV limit, is the largest loan a lender may give as a share of the property's value. MAS sets the limits for bank loans, and HDB sets its own for HDB loans.
The value used is the lower of the purchase price and the valuation. That detail matters most for resale flats. If you pay more than the valuation, the loan is still worked out from the valuation, and the gap, the cash over valuation, comes out of your own pocket. Lesson 6.2, Valuation and cash over valuation, covers how valuations are done.
Whatever the loan doesn't cover is your downpayment. So the LTV limit is really a rule about how much of the price you must pay yourself.
For the arithmetic in this module, take an LTV limit of 70%. It is invented for the example and is not the current MAS or HDB figure.
Farah and Hakim agreed S$620,000 for the Bedok flat, and in this example the valuation came in at S$610,000. The loan is based on the lower figure, so the most they can borrow is 70% of S$610,000, which is S$427,000. Their downpayment is the remaining S$183,000 of the valuation, plus the S$10,000 they agreed above it. In total that is S$193,000 they have to pay themselves.
Had they ignored the valuation and worked from the price, they would have expected a loan of S$434,000 and a downpayment of S$186,000. That S$7,000 difference shows up only once the valuation does, and it shows up as 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 the CPF rules. Cash over valuation is cash only and does not count towards that minimum.
With an HDB loan, there is no minimum cash share, and the whole downpayment can come from CPF if your Ordinary Account has enough when it is due. That is one of the main differences between the two kinds of loan, and lesson 5.1, HDB loan or bank loan, weighs it against the others.
Continue the example with an invented minimum cash share of 10% of the valuation. With a bank loan, Farah and Hakim would need at least S$61,000 in cash towards the downpayment, plus the S$10,000 of cash over valuation, so S$71,000 in cash before stamp duty and fees. The other S$122,000 could come from their combined Ordinary Accounts, which in this example hold S$150,000. With an HDB loan at the same limit, all S$183,000 could in principle come from CPF, leaving only the S$10,000 cash over valuation to be paid in cash.
Same flat, same price, and a cash difference of S$61,000 depending on the lender. For a couple with S$80,000 in savings, as Farah and Hakim have in this example, that decides a lot.
The LTV limit is not one number for everyone. It falls in two common cases.
The first is when you already have a housing loan, or have had one. A second or third housing loan comes with a lower LTV limit and a larger minimum cash share. This catches upgraders who keep their first home while buying the next, which lesson 8.4, Upgrading or right-sizing in the right order, returns to.
The second is a long loan. If the loan tenure goes beyond a set number of years, or runs past a set age for the borrowers, the LTV limit is lower. Banks usually use the average age of the borrowers, weighted by income. Lesson 5.4, Loan tenure, and paying from cash or CPF, comes back to this, because stretching the tenure to lower the instalment can shrink the loan you are allowed.
The age of the property 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 limits for HDB loans. Both have been changed many times, usually as part of cooling measures, and they will be changed again. Your HDB Flat Eligibility letter, from lesson 2.4, gives HDB's loan figure for your own case.
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 the LTV limit that applies to you, the minimum downpayment on your planned price and how much of it must be cash.
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