Owning a home is a major milestone in achieving stability in life. It’s the reason many Singaporeans work hard at their jobs. But Singapore’s property market is not very friendly, and whether you are buying for the first time or refinancing your home, you will need to take out a home loan.
For this reason, one of the most popularly searched questions on search engines is “how much loan can I get from bank?”
This article lets you know the factors lenders take into account when issuing money and how these factors would influence the amount of money you get.
How Much Can You Borrow For Your Home Loan?
The answer to your question “how much loan can I get from a bank” lies primarily in your capacity to repay the loan, which is influenced by your income. Your income level determines the amount that can be lent to you and, therefore, the type of property you can afford to buy.
The debt you have accrued relative to your income also matters, and it’s expressed in a ratio called the debt-to-income ratio.
This ratio indicates whether you would be able to service an additional loan on top of what you are handling presently. So the more significant the proportion of your income taken up by debts, the lesser the credit you qualify to receive.
Another factor is the loan-to-value (LTV) ratio. The LTV is the ratio of the amount of money you wish to borrow against the property’s market value.
Nevertheless, know that even if you meet the borrowing criteria for a bank loan, the maximum amount you can get is 75% of the property’s price and 80% of the property price for a HDB loan.
How To Use A Home Loan Calculator
Besides the abovementioned factors, you can also determine how much you can borrow using a Singapore home loan calculator. The figure you get will be a rough estimation of what you would get if you approached the lenders.
Using a home loan calculator is very simple. Log in to the website and take the following steps:
- Indicate whether the loan you are applying for is for a ‘New Purchase’ or ‘Refinancing’ an old one.
- Choose the type of property you intend to buy, which could be a ‘HDB Flat,’ ‘Executive Condo,’ ‘Condo/Apartment’ or ‘Landed Property.’
- Indicate the status of your intended property, whether ‘Completed’ or ‘Under Construction.’
- Next, indicate the market value of the property and the loan tenure you are looking to have
- Indicate the interest rate offered by your preferred lender.
After entering your details, await feedback in the form of your mortgage breakdown. It will show you the loan amount you are eligible for and the monthly payments set, which are a combination of the principal amount and the interest charged.
What Is The LTV Ratio?
The LTV ratio is a term that lenders use to refer to the ratio of the loan borrowed to the value of the asset purchased. The ratio is calculated by dividing the loan amount by the property’s appraised value and expressed as a percentage.
For example, if you take out a $200,000 loan to purchase a home valued at $400,000, the LTV ratio is 50%.
The LTV ratio is critical to lenders because it indicates the risk they take when granting the loan. A high LTV ratio indicates that the loan being given is close to the property’s value, and if you were to default on the loan, the lender might fail to recover the losses incurred.
On the other hand, a low LTV ratio shows that the loan amount is far below the property value and the borrower has a considerable amount of equity within the property.
In this case, the lender is not likely to lose money in the event of a default. Consequently, lenders prefer to loan borrowers with low LTV ratios.
Note that for properties that are very expensive, ancient, or where your income is low, lenders consider these loans as high-risk and their LTV ratio is very high.
Lenders tend to be reluctant to issue loans for projects in which they would be risking too much. In contrast, purchasing a HDB apartment is considered low risk, and the lender may give the maximum loan requested, 75% for a bank loan and 80% for a HDB loan.
Essentially, the LTV ratio is a critical tool that lenders refer to when assessing risk. As you apply for a home loan, it’s essential to know how they use the LTV ratio and its impact on your application.
What Is The Total Debt Servicing Ratio?
Another ratio you need to know about that is part of the answer to the question “how much loan can I get from bank” is the total debt servicing ratio (TDSR).
The TDSR is the proportion of your income that goes into honouring debt obligations every month. It measures your ability to service their debts and helps lenders assess whether you can afford a new loan. Essentially, the TDSR is used for assessing whether to extend your credit, which is why it’s one of the top eligibility factors in Singapore.
A low TDSR indicates a low debt burden and shows that you will likely honour their monthly payments. A high TSDR indicates a high debt burden, which suggests that you will have difficulty making the monthly payments.
The TDSR is calculated by dividing the gross monthly income by the monthly debt payments. Together with the loan you are applying for, the TDSR should be at a maximum of 55% of the gross monthly income. For example, if your gross monthly income is $10,000, the total monthly debt payments must not exceed $5,500.
Note also that the bank must also conduct a stress test, a simulation that artificially inflates the interest rates, allowing them to see how the market rates would affect your debt.
For example, if your home loan interest rate currently stands at 2.6%, the bank may apply a 3.5% stress test, or even higher, when calculating the TDSR. By doing this, the bank ensures that interest rates will go up in the future, and you still would afford to make your monthly repayments.
A third factor considered when calculating your TDSR is the periodicity of your income. This can be bad news for self-employed persons whose incomes vary. If this is your case, your bank may lower the amount of income used to calculate your TDSR by up to 30%.
While these stringent measures may affect your loan eligibility and the amount you receive, there’s a way around it.
You could apply with your spouse, combining your incomes as one. With a joint application, your income-weighted average age goes higher and you may qualify for large loan amounts.
How To Lower Your LTV Ratio
Since the LTV ratio indicates the level of risk you pose to your lender, the lower it is, the better. A low LTV ratio shows that you have greater equity in the property, which reduces risks for the lenders.
A high LTV ratio means that the lender assumes more risk, so they have to raise the interest rate to contend with the possibility of a repayment default.
So when anticipating to borrow a home loan, it makes sense to lower your LTV ratio. Here’s how to do it:
1. Pay More On Your Downpayment
Make a large deposit when you make your downpayment because it reduces the credit you need, which means having a lower LTV ratio.
It’s best to save money for a long duration and then pay a large downpayment than having to pay a higher interest for your loan because of a high LTV ratio.
However, be warned that saving for a long time can test your patience and may bring disruptions. But if you stay on course, the wait is worth it eventually.
2. Opt For A More Affordable Property
You can also buy a home that is smaller or older than the one you anticipated.
Let your current savings give direction on the kind of home you can afford now so that they can absorb a huge chunk of the purchase price. In this way, you get to only borrow a small amount and pay little interest.
3. Pay More On Your Mortgage Payments
If you are looking to refinance your property, a way to improve your LTV ratio standing is to increase your mortgage payments in the months or years that lead up to your loan request. The greater the equity you accrue through your payments, the lower your LTV.
4. Pay As You Wait
You can also improve your LTV ratio for refinancing by simply waiting. Continue making your mortgage payments without necessarily adding to the stipulated monthly repayments.
The more you pay, the more you build equity in your property. If the home prices in your neighbourhood are going up, the appraised value of your property will go up too, which lowers your LTV ratio significantly.
Access Home Loans in Singapore Easily
While banks in Singapore offer home loans, you may get a better deal seeking it from a licensed money lender.
Credit 21, in particular, is known for its affordable loans, lenient lending terms, flexibility, and low interest rates that have helped many Singaporeans achieve their financial goals much sooner.