Every day, 99.co takes a piece of property jargon and demystifies it. Today, we’re looking at the Income Weighted Average Age (IWAA):
Before we get into it, you need to know about the LTV
For the IWAA to make sense to you, you first need to understand the concept of the LTV. As a quick summary, the LTV ratio determines how much money you can borrow to buy your house. An LTV of 75 per cent, for example, means that you can borrow up to 75 per cent of the price or value of your house (whichever is lower).
The LTV ratio is affected by a number of factors. One of these is your age, and the loan tenure:
For a loan tenure exceeding 30 years (the maximum is 35 years), your LTV will drop to 55 per cent.
If your age plus the loan tenure exceeds the retirement age of 65, your LTV will also drop to 55 per cent.
This can result in a massive cash outlay. For example:
Say you’re buying a condo at $1.5 million (assume the valuation matches the price). Under normal circumstances, you would be looking at a down payment of at least $375,000.
But say your loan tenure is 30 years, and your current age is 40. Your age plus your loan tenure (40 + 30) takes you beyond the retiremet age of 65. As a result, your minimum down payment becomes a stunning $675,000.
This is where many people get a co-borrower, and IWAA matters
It’s quite common for a property to have more than one buyer / borrower. In this case, the bank still needs to calculate the LTV limit; but what if both borrowers have different ages?
When that happens, the bank will use the IWAA. The formula is as follows:
IWAA = (Monthly income of borrower A x age of borrower A) + (Monthly income of Borrower B x age of Borrower B) / total monthly income of borrowers
Say you are 40 years old, with an income of $4,500 per month.
Your spouse, who is your co-borrower, is 33 years old. She has an income of $6,000 per month.
IWAA = ($4,500 x 40) + ($6,000 x 33) / $4,500 + $6,000 = 36
In this scenario, your age will count as being 36.
To qualify for the maximum LTV of 75 per cent, your maximum loan tenure must be 29 years (29+36 = 65).
The general rule to remember
If all the numbers are annoying you, just bear this in mind:
When the younger borrower earns more, the IWAA will be lower. When the older borrower earns more, the IWAA will be higher.
Sometimes, you have to be strategic about this to get the maximum loan quantum. For example, say your spouse is younger than you, but earns less than you. Your son, however, earns more than you. If you want your IWAA to be lower, consider having your son as the co-borrower instead of your spouse.
The IWAA can cause your loan repayments to jump significantly, if you got your loan before it was in effect
If you got your home loan before June 2013, the IWAA was not yet in effect. However, if you refinance your home loan now, it will be – and this can cause your monthly repayments to jump to stunning heights.
For example, let’s say you took your home loan back in 2010. At the time, you were 36 years old, and earning $7,000 a month. Your spouse was 30 years old, and earning $4,000 a month. You used your spouse’s age to get the loan, as there was no IWAA at the time; this would allow you to get the maximum LTV.
Let’s say you took a 30 year loan tenure with an 80 per cent LTV (possible at the time). At two per cent interest, that comes to $3,696 per month.
Today however, you spot a loan with a rate of just 1.7 per cent. You decide to refinance.
This time however, the IWAA kicks in. Assuming your incomes have not changed, your IWAA is:
($7,000 x 46) + ($4,000 x 40) / $11,000 = 43
To maintain the maximum LTV, your age plus the remaining loan tenure cannot exceed 65. As such, your maximum loan tenure is shortened to 22 years.
Even at a reduced interest rate of 1.8 per cent, your monthly repayment will become $4,590 per month; almost $894 more.
So if you got your home loan before June 2013, be careful to crunch the numbers first.
Before you agree to pay for a valuation, start paying down debts to improve your TDSR and so forth, get the numbers from the bank. The higher repayments can create quite the dent in your cash flow, if you’re not paying home loans through your CPF.
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