Possible effects of the recent cooling measures (Part 2 – LTV)

Recently the Government has introduced the latest round of property cooling measures. In this round of property cooling measures, adjustments to the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits on residential property purchases are made.

In my previous article, we have discussed the effects of ABSD.

Here we will discuss the changes made to the Loan-to-Value (LTV) limits and the possible effects of LTV on the property buyers.

 

The tightening of Loan-to-Value (LTV) limits

In the latest round of cooling measures, LTV limits will be tightened by 5% points for all housing loans granted by financial institutions (Do note that the revised LTV limits does not apply to loans granted by HDB).

In short, with the decrease in LTV limit, property buyers are not allowed to borrow as much as before. Property buyers will now have to set aside more for the downpayment for their property (if they are taking a loan from financial institutions).

The table below summarises the adjustments to the LTV limits:

 

1st Housing Loan 2nd Housing Loan From 3rd Housing Loan
Individual Borrowers
LTV Limits Existing Rules

80% or 60% if the loan tenure is more than 30 years* or extends past age 65

Revised Rules

75% or 55% if the loan tenure is more than 30 years* or extends past age 65

Existing Rules

50% or 30% if the loan tenure is more than 30 years* or extends past age 65

Revised Rules

45% or 25% if the loan tenure is more than 30 years* or extends past age 65

Existing Rules

40% or 20% if the loan tenure is more than 30 years* or extends past age 65

Revised Rules

35% or 15% if the loan tenure is more than 30 years* or extends past age 65

Minimum Cash Down Payment No change to existing rules
5% or 10% if the loan tenure is more than 30 years* or extends past age 65 25%
Non-Individual Borrowers
LTV Limit Existing Rules

20%

Revised Rules

15%

Table: Revised LTV Limits on Housing Loans Granted by Financial Institutions
* 25 years, where the property purchased is a HDB flat.

 

 

Effects of the LTV tightening for first time property buyers

Yes, for first time property buyers, you will be affected.

You will have to fork out a bigger amount for down payment. At your first housing loan, you will have to come up with 25% downpayment.

I expect the tightening of LTV to affect the younger buyers more, especially for buyers who have just started working and do not have a lot of cash savings or CPF in their account yet. Accumulating the 25% for the downpayment may take more time now compare to the 20% downpayment previously.

 

Effects for second-time or more property buyers?

Note that the LTV tightening affects the number of housing loan you are having and NOT the number of properties you are buying.

For example if you are a Singapore citizen, and you currently own a fully paid property, you will definitely have to pay the newly increased ABSD rate. If you were to take a loan for this second property, it will be considered as your first housing loan, since your first property is already fully paid (without any outstanding loan). Your LTV for this second property will be 75%.

However if your current property still has an outstading loan, and if you were to take a loan for this second property, it will be considered as your second housing loan. In this case your LTV is 45% *(see table above). You may have to fork out 65% for the downpayment. (Note: You still have to pay for the newly increased ABSD rate for this second property)

Therefore, it is not the number of properties you own, but the number of housing loan you are having. This measure should also discourage those who are already highly leveraged from taking on more housing loans.

 

Are these changes all bad after all?

With the new revised LTV limits, property buyers will now be getting a smaller loan compared to before. Thus with a smaller loan, the monthly instalments will likely to be lower. This may actually lower the risk of the property investment. In addition, the total amount of interest paid over the full loan tenure will also be lower.

I have illustrated in the table below, the effects of the tightening of LTV on the instalment amount and the total interest paid:

Downpayment % 20% downpayent 25% downpayment

(after cooling measures)

Purchase Price $1,200,000 $1,200,000
Downpayment $240,000 $300,000
Loan $960,000 $900,000
Interet Rate 2% 2%
Loan Tenure/ years 25 25
Monthly Instalment $4,069.00 $3,814.69
Total interest Paid $260,700 $244,407

With a larger downpayment, the monthly instalment and total interest paid throughtouth the loan tenure will be lower.

I have also done a comparison on the possibility of an interest rate increase:

Downpayment % 20% downpayent 25% downpayment
Purchase Price $1,200,000 $1,200,000
Downpayment $240,000 $300,000
Loan $960,000 $900,000
Interet Rate 4% 4%
Loan Tenure/ years 25 25
Monthly Instalment $5,067.23 $4,750.53
Total interest Paid $560,170 $525,159

When interest rates doubles from 2% to 4% the instalment increase more with the lower 20%-downpayment amount (increase of $998.23) compared to the larger 25%-downpayment amount (increase of $935.84).

If you have any queries on how you should plan for your next property purchase, do drop me a note below:

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Other than this blog, I also shared my property investment knowledge through seminars. Here is a written summary of my last round of seminars called “Property Deals Review”

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