Tenure And Loan-To-Value (LTV)
The final step in this 5-step process of home loan selection looks at decisions on how much and for how long, ie. loan quantum and tenure.
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To summarize the 5 steps before we go on:
- Interest Rate
- Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
- Special Features (eg. interest offset account, switching between sibor periods etc)?
- Personal Considerations
- Tenure and Loan-to-Value (LTV)
To be more precise, tenure and loan quantum are not exactly factors you consider when choosing which bank’s loan package to go for. Tenure might be a decision factor in the past as different banks might use different yardstick to assess what is the “average age” for the applicant when there are 2 borrowers typically husband and wife and where there is quite an age gap. Some banks will take the age of the younger borrower resulting in a longer loan tenure and hence lower monthly repayment. Others will use the average age of the two. However these idiosyncratic practices have stopped since 29 June 2013 when MAS introduced the income-weighted average age as a uniform assessment policy the same time it rolled out TDSR. All banks will need to comply and use the new measure so you will get the same tenure no matter which bank you go to.
Nonetheless tenure and loan quantum are still important decisions affecting your loan repayment and warrants a separate discussion per se.
In Singapore most people tend to like to stretch the loan over the maximum period possible. Some of you might recall UOB promoting a 50-year loan tenure as a selling point few years ago.
Recognising the excessive interest one pays over a long tenure and how some people ultimately over-stretch themselves by taking on more than a few mortgages by paring down the monthly instalments through longer tenures, MAS has since last year capped the maximum tenure at 35 years for private property loans and 30 years for HDB. Furthermore if your loan goes pass 30 years or age 65 you will be “penalized” with a lower LTV (loan-to-value) covered in the next section. All these to discourage people from taking too long a tenure.
As a general rule of thumb, anything in the 20-25 year range is good as one will be able to fully pay down his mortgage before age 65 where you need the rental as passive income to retire on, instead of paying the bank. Remember the longer your tenure the more interest you will pay over the long run. For an owner-occupied home, your main aim will be to try and pay down the loan as quickly as you can to save on interest costs (which makes the bank rich) so go 20 years or lesser as long you are confident to service the higher instalment that comes with a shorter tenure.
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For investment property where you rent out, this might take on a different strategy for some. Typically investors waiting out a property cycle in order to make a decent capital gain on their assets will want to minimize their property holding costs so that the rentals which fluctuate from time to time will be able to cover their loan instalments. That way there is no “cash out” from their pockets. Thus it is not unusual for them to go for longer tenures but still the new 35 year loan cap applies. Some investors with existing 40-year loan tenure will have to think hard about refinancing as their monthly instalments will suddenly shoot up with a shortened tenure. Some joint-borrowers with a big age gap might also face similar plight due to the income-weighted average age as highlighted earlier.
One piece of good news here though is some concessions given earlier this year in Feb 2014 where MAS allowed mortgages on owner-occupied homes only to keep to their existing tenure on refinancing even if it goes beyond 30 or 35 years respectively for HDB or private properties. The maximum loan tenure allowed for all refinancing cases will be computed from the date of the original loan.
Loan to value measures how much loan as a ratio of its current valuation which is why most borrowers will need to pay a small fee for a valuation report when taking up a home loan be it for new purchase or refinancing. There are limits set by the authorities now that govern how much you can loan.
The LTV limits announced by MAS back in 12 Jan 2013 applies to loans for new purchases :
In a nutshell, people with at least one existing mortgage loan which is the majority of us, will get their LTV cut drastically when they take up a 2nd (50%) or 3rd (40%) property loan for their next purchase. This will be further reduced to 30% and 20% respectively if the loan goes past 30 years or 65 years old. In the latter case, take for example someone age 55 who buys his third property and takes up a 3rdmortgage loan of 15 years going past 65 years old, he can only borrow 20% of the valuation of the property, ie. he needs to pay down in cash 80%! Nobody does that for property investment which is effectively the reverse of leverage – put down 20% deposit and borrow the rest so you get a 5 times leverage on returns.
However the above LTV limits do not apply for the case of home loan refinancing which most banks will still offer LTV of up to 80% of the property value for sole mortgage and 60% for 2nd mortgage onwards, subject to meeting of TDSR . Therein lies a loophole where one can try to stretch for maximum loan during his property purchase by first keeping his tenure not beyond 65 years old (ie. 50% loan for 2nd property instead of 30%), pays a higher monthly instalment but only for a few months, picks a loan package with no lock-in so that he can immediately do a refinance and now stretch his tenure longer to bring down his monthly instalment.
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When it comes to loan quantum in Singapore, your wish to get maximum leverage might be curtailed by the law. Looking at it positively, taking a lower loan quantum will likely allow you to pay off your monthly instalment entirely from the rentals and you pay the bank lower interest in the long run.
On loan quantum, one final note for those who have been servicing your mortgage diligently over the years, do note that you may not be able to refinance your loan when your outstanding goes below the minimum loan size (usually $100,000) required by most banks in Singapore. This means that in your final stretch of the tenure, you may want to choose every carefully the bank you refinance to and make sure you get one with a good long-term rate that will see you out till the end of the tenure, or simply be prepared to redeem the loan in full if interest rises.
Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.