Written by: Marissa Saini
Have you and your partner started on your housing journey and currently in the midst of financial planning? While our complimentary mortgage advisory service will assist you on everything home loan-related, we understand how doing the math on your own is important too.
To help you navigate the financial planning process like a pro, we explain the many confusing mortgage terms you’ll inevitably encounter.
What is Loan Tenure?
Loan tenure is the duration of your loan repayment period or how long it takes for the borrowers to pay back the loan. Your loan tenure is determined by the property type you intend to purchase. The maximum loan tenure is capped at 30 years for HDB flats and 35 years for private properties.
Why is Loan Tenure important?
It will reduce your monthly installment because the longer the tenure, the more manageable the monthly installment.
Based on the HDB and private property guidelines of 30% Mortgage Servicing Ratio (MSR) (for HDB) and 60% Total Debt Servicing Ratio (TDSR) (for private property), a longer loan tenure will actually allow you to borrow more if that is your requirement.
The amount you can borrow depends on your Loan To Value (LTV).
What is LTV?
The LTV dictates the amount you can borrow from the bank. Having an LTV ratio of 55% allows you to borrow up to 55% of the property’s value or price, whichever is lower.
|No. of existing home loans||Sum of tenure and borrower’s age||LTV ratios||Minimum downpayment in cash|
|None||65 years and below||75%||5%|
|One||65 years and below||45%||25%|
|Two or more||65 years and below||35%||25%|
Assuming you’re applying for your first property loan at 35 years old (at application), take the 65-year cap (if you’re borrowing 75% LTV) and subtract it with your current age. The remaining loan tenure you’ll be eligible for is 30 years for a private property loan and 25 years for an HDB loan (assuming it’s your first property).
Note that the balance 5% downpayment must be paid in cash while the remaining 20% can be paid via cash and/or CPF.
What happens if I have a joint borrower?
This happens more often than not as most people would prefer to buy a property together with their spouse or child. When there’s a co-borrower, banks calculate the present age through the Income Weighted Average Age (IWAA).
What is IWAA?
The IWAA takes effect for joint borrowers by taking into consideration their average age, and combined income.
Here’s how IWAA is calculated:
(Age of younger borrower x gross monthly income) + (Age of older borrower x gross monthly income) /
(Gross monthly income of younger borrower + Gross monthly income of older borrower)
The income of the younger borrower is higher than the income of the older borrower.
Borrower A is 26 years old who earns a gross monthly income of $5,000.
Borrower B is 40 years old who earns a gross monthly income of $3,000.
IWAA = (26 x 5,000) + (40 x 3,000) / (5,000 + 3,000)
= 31 years
Outcome: IWAA is lower.
The income of the younger borrower is lower than the income of the older borrower.
Borrower A is 27 years old who earns a gross monthly income of $3,000.
Borrower B is 40 years old who earns a gross monthly income of $7,000.
IWAA = (27 x 3,000) + (40 x 7,000) / (7,000 + 3,000)
= 36 years
Outcome: IWAA is higher.
Based on the above scenarios, it is generally better for a younger borrower to earn more than an older borrower as it will result in a lower IWAA (31 years vs 36 years). The lower your IWAA and loan tenure, the higher your LTV. Note that the longer the loan tenure, the more interest you are likely to pay as well. It’s best to appoint your co-borrower with this in mind, as choosing your daughter instead of your spouse as a co-borrower will potentially minimise your loan tenure.
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