Homeownership is a dream for many individuals, and a rite for passage for us Singaporeans. It is also a significant investment that requires proper planning.  A common question among prospective homebuyers is: "how much can I borrow for a home loan?"

The answer to this question depends on two key factors. First, the maximum size of your mortgage is dependent on how much you can afford given your own financial circumstances. Second, your home loan opportunities are determined by what banks are willing to lend you based on a number of indicators, including your finances and government regulations .

In this article, we examine these two factors in depth, to help you better understand the home loan process.

How much loan can you afford?

Before you can decide how much to borrow, you must understand how much you can afford to pay for a new home in terms of upfront and on-going costs. By setting realistic expectations, you can find a great home that you can afford and set yourself up for financial peace of mind in the future.

Upfront cost: Down payment

The first thing to consider when deciding how much "home" you can afford, is to estimate how much you have to save for your home's down payment. This includes your cash savings, your CPF Ordinary Account savings and any net proceeds (net of outstanding mortgage) from the sale of your current house (if applicable). These savings help dictate how much you can actually borrow.

^ The Lower LTV limit applies if the loan tenure exceeds 30 years (or 25 years for HDB flats), or the loan period extends beyond the borrower’s age of 65 years.

Source: Monetary Authority of Singapore

The remaining amount that is not covered by a housing loan can be paid via cash, CPF OA funds, or a combination of both. Hence, even though the minimum cash downpayment may only be five per cent on a bank loan (assuming you have no outstanding mortgages), you still need to have 25 per cent of the value of your home saved between cash your CPF OA account to be able to afford to purchase a house.

On-going costs: Monthly mortgage payments, maintenance & insurance

In addition to choosing a home loan with a principal you can afford, you should apply for a housing loan with manageable monthly payments.

When comparing loans it is important to keep in mind that choosing a longer loan tenure helps to reduce the required repayment each month. However, it also raises the total amount you will pay in interest costs over the course of the loan.

Additionally, it is important to be aware that interest rates can change and that you should not only compare introductory interest rates, but also the rates in the following years. Fortunately, homeowners have the option to refinance their loan in the future, which often allows them to secure a better rate from another bank.

In addition to mortgage payments, homeowners should budget for homeowners insurance, fire insurance, property tax, conservancy fees and management service fees. Without doing so, homeowners may be unprepared for the total cost of homeownership and have to spend hard earned savings or take on additional debt.

How much can I borrow for a mortgage loan?

After you have a sense of how much you can afford to pay for your home, you can begin to decide how much you can and should borrow. With that said, it is important to understand the lending guidelines of banks and the Housing & Development Board (HDB). These lenders consider a number of factors when deciding how much to lend. First, lenders three key ratios: MSR, TDSR and LTV. They also consider a range of other factors described below.

Mortgage Servicing Ratio (MSR)

The Mortgage Servicing Ratio (MSR) measures the amount of your gross monthly income that can be used to pay (or “service”) your home loan. You can calculate MSR by dividing your monthly mortgage payment by your gross monthly income.

The maximum allowable MSR for banks and HDB home loans is 30 per cent. This means that if you earn S$5,000 each month, your maximum home loan payment would be S$1,500 (i.e. S$5,000 x 30 per cent = S$1,500).

It is important to note that MSR also includes all of your property loan obligations. For example, if you are currently paying S$1,000 for an existing home loan, this figure will be included in your MSR calculation (e.g. S$5,000 x 30 per cent = S$1,500; S$1,500 – S$1,000 = S$500 remaining for a new home loan)

Additionally, if you are married, your spouse’s income will be accounted for in the MSR calculation. To use the original example, if you each earn S$5,000, your maximum loan payment would be S$3,000 (i.e. (S$5,000 + S$5,000) x 30 per cent = S$3,000).

Total Debt Servicing Ratio (TDSR)

The Total Debt Servicing Ratio (TDSR) takes into account all of your monthly debt repayments (e.g. car loan, home loan, credit card debt), unlike the MSR which only focuses on mortgage payments.

The current TDSR limit is set at 55 per cent of the borrower’s monthly income. This means that borrowers cannot borrow a home loan that will result in their total monthly loan payments exceeding 55 per cent of their monthly income. For more information, please refer to our full TDSR guide.

Loan-to-Value Ratio (LTV)

The Loan-to-Value Ratio (LTV) is a measure to assess the size of the loan in relation to the value of the home. To calculate your LTV, divide your desired loan principal by the home’s purchase price.

• Loan Amount ÷ Asset Price = Loan-to-Value (LTV) Ratio
• Loan Amount: S$200,000
• Home Purchase Price: S$500,000
• LTV: 40 per cent

In Singapore, the LTV limit depends on your home type and the number of outstanding mortgages you have. The maximum LTV for bank loans is 75 per cent, while the maximum is 80 per cent for HDB concessionary loans. However, banks are not required to offer loans of the maximum LTV amount. In reality, they will make decisions based on your complete borrowing profile.

Additional home loan borrowing factors

In addition to these important ratios, banks will decide how much to lend you based on additional factors. For example, banks will consider how many outstanding home loans you have, as well as how much you owe for these loans. This helps them measure your relative risk of default due to other debt obligations.

Additionally, they will consider the remaining number of years on your desired property's lease, the location of the property. These help the bank understand the value of the property. Finally, banks will consider your age and the loan's tenure, as well as your credit score.

ALSO READ: Why every Singaporean homeowner needs to know the 3-3-5 rule

This article was first published in ValueChampion.