Buying a home can be exciting but intimidating. One should make adequate preparations and planning to ensure that they would be able to secure the dream home they have always been wanting to buy.
And since it involves a whole lot of money, you might need to get a mortgage to help you with the finances.
When taking out a mortgage, one of the main considerations a home buyer should bear in mind is the Loan-to-Value (LTV) ratio, otherwise known as the margin of finance.
Notably, many property purchases have been abandoned by buyers due to unfavourable LTV ratios.
So, What Is Loan-to-Value (LTV) ratio? How Does It Affect Residential Mortgage Loans?
LTV is a lending risk assessment ratio examined by financial institutions and other lenders before approving a mortgage.
Assessments with high LTV ratios are usually considered as higher risk. Thus, if the mortgage is accepted, the said loan will cost the borrower more.
Here in Malaysia, home buyers normally expect 90 percent LTV ratio for a housing loan.
So, if Ms. A’s dream home cost RM600,000, she can get a mortgage of RM540,000. This implies that Ms. A would only have to shoulder the remaining RM60,000.
On 2 November 2010, however, Bank Negara Malaysia issued a policy regulating the LTV ratio for housing loans.
Aside from supporting a sustainable and stable property market, the measure aims to promote the continued affordability of homes for the general public.
Under this policy, the maximum loan-to-value (LTV) ratio is capped at 70 percent for borrowers purchasing their third home. The rule does not apply to financing facilities for first and second homes.Check out properties for sale
Banks Regulation On LTV Ratio
In the release, the central bank noted that the “targeted implementation of the LTV ratio is expected to moderate the excessive investment and speculative activity in the residential property market which has resulted in higher than average price increases in such locations.
This has also led to increases in house prices in surrounding locations, thus contributing to the declining overall affordability of homes for genuine house buyers.”
The government’s effort in encouraging home ownership among Malaysians is also evidenced by its My First Home Scheme (Skim Rumah Pertamaku) – in which qualified first-time home buyers are given up to 100 percent LTV.
In November 2013, Bank Negara Malaysia issued another circular requiring banks to calculate the LTV ratio based on the property’s net price instead of the price stated in the Sale and Purchase Agreement (SPA).
The price in the SPA usually refers to the property’s gross sale price before any discounts or rebates are given. This usually includes the cost of freebies provided by the property developer (such as free furniture or home appliances)
These discounts or rebates artificially reduces the entry cost for owning a home. As such, buyers can acquire a home for lesser down payment and leverage at a higher margin of finance.
In a bid to reduce speculative demand in properties, the central bank mandated that the net selling price of the property should be used in LTV calculation for all mortgage financing in Malaysia.
So, if the SPA price of the property that Ms. B wants to buy is RM700,000, and the developer offers an eight percent discount (this would be RM56,000), the net selling price of the property would be RM644,000 [RM700,000 – RM56,000].
If Ms. B is a first time buyer, she can get a loan of RM630,000 (RM700,000 x 90%) based on the old rule. But with the new rule, Ms. B can only avail of RM579,600 (RM644,000 x 90%).
Apart from Bank Negara regulations, banks also limit the LTV ratio for below types of housing loan based on the institution’s internal credit policies:
- More than one existing housing loan
- Purchase for investment
- Developer projects known to offer discounts to customers
- Land for custom built homes
Moreover, banks allow an additional margin of finance of up to five percent on the loan in order to finance the borrower’s valuation costs and loan documentation.
Foreigners tend to face more LTV restrictions on their residential mortgage loans since banks exercise more caution in granting loans to individuals with less ties to Malaysia.
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