When getting a new home loan in Singapore or refinancing, you may have come across the terms income-weighted average age and loan-to-value.
Today let's dive a little more into what these mean.
What is income-weighted average age?
For joint borrowers, income-weighted average age is a way of determining your present age as if you were a single borrower. This will determine how much you can borrow based on your joint income and age difference.
How to calculate income-weighted average age?
The formula is:
(Borrower 1's Age x Borrower 1's monthly income) + (Borrower 2's Age x Borrower 2's monthly income)
divided by (Borrower 1's monthly income + Borrower 2's monthly income)
Huda is getting a new home loan with her husband Azri.
- Huda is 40 and earns $6,000 gross monthly income.
- Azri is 35 and earns $4,000 gross monthly income.
Therefore their income-weighted average age is (40 x 6,000) + (35 x 4000) divided by (6,000 + 4,000), or 380,000/10,000 = 38
- If the older person earns more, the income-weighted average age will be higher.
- If the younger person earns more, the income-weighted average age will be lower.
Why is income-weighted average age important?
Some time ago, in the not-too-distant past, home loans in Singapore were much easier to obtain. There were many then-legal loopholes to ensure that homebuyers could access large amounts of financing.
In the past few years, we've seen how this has led to skyrocketing property prices, based on loans that may be overstretching the borrowers' ability to repay.
Before income-weighted average age was implemented in 2013, banks and financial institutions allowed joint borrowers to get a loan based on joint income and the age of the younger borrower.
This was a major loophole because high-income earners were able to rope in their adult children as joint borrowers, which allowed them to enjoy larger loan amounts and longer loan tenures due to the age difference.
By introducing income-weighted average age, this age difference is taken into consideration, preventing borrowers from overextending themselves beyond their means.
This is where loan-to-value limits also come in.
What is loan to value?
Loan to value (LTV) for property loans refers to the proportion of the loan amount to a property's value. In Singapore, the maximum LTV for properties is 75 per cent, with the exception of HDB loans which has a maximum LTV of 85 per cent as of the 2021 cooling measures.
However, LTV limits are dependent on three things:
- How many outstanding housing loans you currently have
- Whether the loan period extends beyond age 65
- Whether the loan tenure is more than 30 years (or 25 years for HDB flats)
|Outstanding Housing Loans||Maximum loan to value (LTV)|
|None||75 per cent or 55 per cent|
|1||45 per cent or 25 per cent|
|2 or more||35 per cent or 15 per cent|
If your loan period extends beyond age 65 or your loan tenure exceeds 30 years (or 25 years for HDB), then the lower LTV limit is applied.
How income-weighted average age affects LTV
Let's take the example of an older homebuyer who is hoping to enjoy a high LTV by applying for a loan with their adult son.
They are hoping for a loan tenure of 25 years.
The parent is 50, and earns $7,000 a month, while the son is 30, and earns $3,000 a month. Their income weighted average age is 44.
This means that if they want a loan tenure of 25 years, it will extend beyond age 65, since 44 + 25 = 69.
Instead of the 75 per cent LTV most homebuyers can enjoy, they are now limited to a maximum LTV of 55 per cent.
This article was first published in Mortgage Master.