The Key to a Home Purchase: Budgeting for Down Payments and Understanding LTV & DTI
Wonder how much of a down payment is needed to buy your desired property? Here we will explain the loan-to-value (LTV) ratio and debt-to-income (DTI) ratio using different scenarios, with analysis on the points to note for different income types.
The down payment amount needed to buy a home depends primarily on the loan-to-value (LTV) ratio, which is affected by many different factors – for example, the property’s value and type. The applicant’s borrowing capacity will be impacted if he/she does not receive a regular salary, if he/she owns other residential properties, or if he/she is not purchasing for self-occupancy.
First of all, what do LTV ratio and DTI ratio refer to?
Loan-to-value (LTV) Ratio
When a bank approves a mortgage loan, it will not lend the total value of the property, but a certain percentage (e.g. 70%) depending on different factors. This is the loan-to-value ratio.
Debt-to-income (DTI) Ratio
To ensure the applicant's monthly income is sufficient to repay the loan, his/her total financial obligations including mortgage repayment can only account for a certain percentage (usually 50%) of the applicant's monthly income. Specific requirements may vary from individual to individual.
For HIBOR-based mortgages, the bank will calculate the monthly payment based on the capped interest rate of the mortgage when calculating the DTI ratio.
Further reading: Decoding Mortgage Interest Rates: "H-based", "P-based" and Fixed Rate plans
Now, let’s take a look at how different scenarios will affect the LTV ratio.
Scenario 1: Basic LTV Ratio – General LTV Without Applying for a Mortgage Insurance Plan
| Self-Occupied | Non-Self Occupied (Including Investment or Leasing Out) |
|
| LTV for property value ≤$30M |
70% | 60% |
| LTV for property value >$30M - ≤$35M |
60% - 70% (Maximum loan amount of $21M) |
|
| LTV for property value >$35M |
60% | |
| DTI Ratio | 50% | 40% |
- As shown above, Toby intends to live in the property herself. The LTV ratio of properties valued up to $30M can be as high as 70%, meaning Toby can borrow up to $5.6M.
- Since Toby is a first-time home buyer, her DTI ratio cannot exceed 50% of her total income.
- If a loan of $5.6M is borrowed at an interest rate of 3.5% for a 20-year term, the monthly mortgage repayments will be about $32,500. Since Toby has a monthly income of $70,000 and no other debts, she meets the DTI ratio requirement, with loan payments not exceeding 50% of her total income.
- Toby may consider applying for mortgage insurance if she wants a higher LTV ratio.
Scenario 2: LTV Ratio if Currently Mortgaging or Guaranteeing Other Properties
| Self-Occupied | Non-Self Occupied (Including Investment or Leasing Out) |
|
| LTV for property value ≤$30M |
60% | 50% |
| LTV for property value >$30M - ≤$35M |
50% - 60%* | |
| LTV for property value >$35M |
50% | |
| DTI Ratio | 40% | 40% |
| * Maximum Loan Amount = [($21,000,000 / Property Value) - 10%] x Property Value | ||
- Stanley already owns one or more mortgaged properties with outstanding loans, and the new apartment is not for self-occupancy. That means the LTV ceiling needs to be lowered to 50%.
- Whether self-occupied or not, the DTI ratio for a second property should not exceed 40%.
- In this case, Stanley has to budget more for his down payment.
Tips:
- Banks will appoint a third-party professional agency to appraise the property and take the valuation or purchase price of the property (whichever is lower) as the basis for LTV calculation.
- Whether you are a mortgagor, borrower or guarantor, if you have other debts or lines of credit, such as other mortgages, personal loans, auto loans, tax loans, credit card loans, etc., these will also affect the calculation for DTI ratio.
Note: Mortgage loan approval is subject to the applicant's personal circumstances and the applicable terms and conditions and policies at the time. Approval is subject to credit assessment and the bank reserves the right of final decision.
To borrow or not to borrow? Borrow only if you can repay!
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