Asset Backed Lending
Asset Backed Lending (ABL) is a type of calculation used by the banks to determine the housing loan available for customers. This is a very straight forward kind of calculation.
The banks will look into the valuation of the property and grant a certain percentage of the valuation. Usually it is at 70% of the property valuation.
Mr Lee is interested to purchase a property of 1m. He current holds a sales manager job and earns $3.5k monthly. He has a car loan and is paying $600 per month.
With an income of $3.5k per month, he could only borrow up to $450k if the bank uses the traditional income method for calculation. After the car loan is factored in as a liability, the maximum loan available for him is about $300k.
Using the ABL method, the bank will disregard his income and liability and grant him a loan of maximum 70% of the property valuation. Therefore, Mr Lee can loan up to 700k (70% of 1m) to purchase his desired property. The remaining 30% must be paid in cash and CPF (1st 5% must be in cash).
However, ABL varies from bank to bank. Some banks required support documents to justify the case. Documents like bank balance to prove that client has the ability to finance the loan for the next 24 months.
For a 700k loan (loan tenure at 35 years at an interest of 2%), the monthly installment is $2319. Mr Lee also has a car loan of $600 per month. So Mr Lee need to support with a bank balance of ($2319 + $600) x 24 months = $70,056.
Important note – If Mr Lee existing has a HDB loan, the maximum loan available using ABL will be capped at 60%. This is due to the new ruling of 2nd property loan capped at 60%.