Finding a home is tough, but figuring out how to pay for one is tougher. Unlike most day-to-day purchases, the initial price tag on your home only gives you an idea of how much it will ultimately cost.
Most people pay for their home loans over the course of 20 to 30 years, after all. The economy, your income, and financial liabilities will drastically change throughout this period, so people can only make educated guesses as to how much they will eventually pay over this period of time.
The varying factors that dictate the principal value of home loans can be surmised in the following three metrics:
- Loan tenure
- LTV or Loan-to-value limit
- IWAA or Income weighted average age (applicable to joint borrowers only)
To the uninitiated, these terms may appear intimidating. There will be a bit of math involved, so prepare your calculator and get ready to crunch some numbers.
What is a loan tenure and how does it affect the loan principal?
Loan tenure is probably the most straightforward term out of the three. It basically represents how long you intend to take to pay off your loan. The following table quickly summarises the age old question of the differences between shorter and longer tenures.
Total interest accumulated
Liquid cash available for leisure, investments and emergencies
Maximum amount that can be borrowed
*Most home loan plans allow for home tenures to be adjusted after an initial lock-in period, although banks typically charge an administrative fee for this.
If your goal is to be debt free, go for a shorter tenure. If you want more cash liquidity, a longer tenure might be more appropriate. But don’t get any ideas about stretching your loan tenure to 100 years, because the Monetary Authority of Singapore (MAS) has a 30 year loan tenure cap for HDB flats and a 35 year cap for non-HDB properties.
On the flipside, there are limits to how short your loan tenure can be, too. According to the Mortgage servicing ratio (MSR) rule, owners of HDB flats and executive condominiums are not allowed to spend more than 30% of their gross monthly income on home loan instalments.
Private property owners are not unbounded, either. The Total debt servicing ratio (TDSR) dictates that no more than 55% of a person’s gross monthly income can go into repaying their debts.
For full details on how to calculate MSR and TDSR, check out this article where we lay out things you should consider when choosing a home loan plan.
What is the loan-to-value limit (LTV) and how does it affect my down payment value?
Apart from monthly instalment limits, each individual’s loan-to-value limit (commonly referred to as LTV) determines the maximum amount that they can borrow from banks, as well as the minimum downpayment that borrowers must pay in cash.
Number of Outstanding housing loans
Age of Borrower When Loan Tenure Ends
Minimum cash downpayment
65 and above
65 and above
65 and above
*This table only applies to loans on residential properties if the OTP was granted on or after 6 July 2018. Source: Rules for New Housing Loans, Monetary Authority of Singapore
MAS places greater restrictions on borrowers who already have outstanding debt, and if their loan tenures extend beyond the time when they will be 65 years of age. This is to prevent home buyers from biting off more than they can chew.
If you already have existing loans, taking on more will lower your chances of repaying your debts. Similarly, borrowers who are 65 and older have a higher chance of being closer to retirement.
But paying off loans within a short period of time isn’t always feasible. That’s why some people choose to borrow jointly with their spouses or close family members. That’s when the next factor kicks in.
What is income weighted average age (IWAA) and who should be my joint borrower?
When you have a co-borrower, banks won’t simply take the age of the younger individual to calculate their LTV. That would be too easy of a loophole for people to exploit.
Instead, banks take the ages of both joint borrowers and assign a combined age to the pair based on the IWAA formula:
(1st borrower’s age X their gross monthly income) + (2nd borrower’s age X gross monthly income) / (Total gross monthly income of both borrowers)
Mathematically speaking, a younger borrower has a lower multiplier on their income, which contributes to a lower IWAA. Therefore, if you’re aiming to take out a higher loan sum, it would be advantageous to have the younger borrower earning more than the older borrower. This is also the reason why many home buyers might opt to co-borrow in their children’s name as opposed to their spouse.
Here are two example scenarios to help visualise things:
IWAA example scenario (younger borrower with higher income)
Borrower A: 26 years old, earns $5,000 a month
Borrower B: 40 years old, earns $3,000 a month
IWAA = (26 x 5,000) + (40 x 3,000) / (5,000 + 3,000) = 31 years
IWAA example scenario (younger borrower with lower income)
Borrower C: 27 years old, earns $3,000 a month
Borrower D: 40 years old, earns $7,000 a month
IWAA = (27 x 3,000) + (40 x 7,000) / (7,000 + 3,000) = 36 years
If you’ve made it through this article without splitting your head, congratulations! But don’t think that you’ve seen the last of home buying related calculations just yet. There’s other things to consider, such as deciding on your mortgage type and choosing the right conveyance lawyer – all of which can make a difference of thousands of dollars in your final bill, so start taking notes if you haven’t already.
Get an accurate valuation of your home with ease
Calculating how much to set aside for your dream home shouldn’t have to be so hard. Contact our Super Agents via Whatsapp and let them do the mathematical heavy lifting for you.
What’s more, you can find a home that fits your financial needs the smart way with Ohmyhome’s data-matching technology. Simply submit your preferences and let our algorithm MATCH you with a home that you can afford.
So don’t hesitate to reach out for financial advice and consultations on home ownership. As home owners ourselves, we’re ready to share everything that we know to help you on your journey. Because at Ohmyhome, we’re always by your side, always on your side.
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