Loan-to-Value: the ratio of a loan to the value of a purchased asset.
The Loan-to-Value ratio, otherwise known as the LTV ratio, is, in fact, a term used in finance, typically by financial institutions (eg banks) and building societies to express the ratio of the first mortgage lien as a percentage of The total assessed value of real property. For example, in the event that a person borrows S $ 150,000 in order to purchase a property valued at S $ 200,000, the LTV ratio is considered S $ 150,000 to S $ 200,000, in other words S $ 150,000 / S $ 200,000, or 75 %. The remaining 25% is the lender's haircut, covered by the borrower's equity. Normally, the higher the LTV ratio, the riskier the mortgage.
Loan-to-value is among the decent risk factors that lending institutions evaluate before deeming a borrower eligible for a home loan. Generally, the greater the LTV ratio is, the stricter the eligibility guidelines for mortgage packages become, as the risk of default becomes foreseen in the lender's evaluation. In order to diminish the risk of defaulting in the case of high-LTV ratio loans, lenders may ask borrowers to buy mortgage insurance, therefore increasing the loan amount.
In Singapore, effective 12 January 2013 are the following regulations concerning home loans, that also include the LTV ratio:
1. Non-individual borrowers have a cap of 20% LTV
2. Residential property loans may only allow a loan tenor of maximum 35 years.
3. For a loan tenor of more than 30 years or if the borrower's age acknowledges the legal age of retirement in Singapore (65 years), the borrower can:
- Borrow up to 50 percent of the total property value if he / she does not have an existing home loan.
- Borrow up to 30 percent of the total property value if he / she does have an existing home loan.
As a rule, the second mortgage is capped at 60% LTV. A large number of Singaporeans are unsure whether they are eligible for an 80% LTV or not when they already own a residential property. The 60% LTV rule is applicable in the case of a second mortgage. If a borrower has another property already fully paid, he / she can still qualify for an 80% LTV.
It is important to note that new regulations apply to new purchases. If a borrower already has a mortgage, he / she can refinance and cashout at 80% LTV.