When you plan to buy a home, you often start seeking home loan options without focusing much on your own contribution to the home-buying process.
What is your contribution
The borrower's contribution is the down payment which is typically a percentage of the property's value which is paid upfront to the home seller. In most cases, the financial institutions, finance a certain percentage of the property's value, known as the loan-to-value (LTV) ratio. They often finance 70% to 80% of the home value and the remaining 20% to 30% is expected to be covered by the borrower using their own funds.
What is the LTV ratio
The Loan-to-Value (LTV) ratio in a home loan shows the percentage of the loan that will be financed by the finance institution. They use it to assess loan risk. A lower LTV ratio indicates less risk for the lender, as the borrower has a higher contribution. The LTV ratio can vary based on factors such as the borrower's creditworthiness, the type of property, and the lender's policies.
Here are a few reasons why you need to additional down payment:
1. Reducing the loan amount: Making a down payment allows you to reduce the overall loan amount. The larger the down payment, the smaller the loan amount, which may help you get low interest rates.
2. Loan-to-Value (LTV) ratio: Lenders consider the Loan-to-Value ratio, which is the ratio of the loan amount to the property's evaluated value. A higher down payment helps fulfil the lender's requirement and ensures you meet the acceptable LTV ratio.
3. Avoiding mortgage insurance: Making a substantial down payment can help you avoid the additional cost of mortgage insurance. Mortgage insurance is typically required for higher LTV ratios and protects the lender in case of default. By paying a significant down payment, you may be able to avoid this extra expense.
4. Building equity: A down payment immediately establishes equity in the property. Equity is the portion of the property you own outright, without any outstanding loan. Having good equity can provide financial security, as it represents ownership and can be utilised for future needs, such as obtaining additional financing or refinancing options.
It is important to note that your contribution plays a crucial role in determining the loan amount, interest rate, and eligibility for a home loan. It is advisable to carefully plan and save for a down payment to make your home loan journey more affordable and financially secure.
What is OCR amount in home loan
‘OCR’ typically stands for ‘Outstanding Capital Remaining’, and it refers to the remaining principal amount of a loan, including a home loan. In terms of home loan, OCR is the amount of the original loan principal that you still owe to the lender. As you make regular monthly payments toward your home loan, a portion of the payment goes toward reducing the outstanding capital remaining.
Here is how it works:
- Initial loan amount: When you opt for a home loan, the lender provides you with a certain amount of money to purchase the property. This initial amount is the loan principal.
- Monthly payments: Each month, you make a payment toward your home loan. This payment typically includes both the interest charged for that month and a portion that goes toward reducing the principal amount.
- Reducing principal: As you make these monthly payments, the portion that goes toward the principal helps decrease the outstanding capital remaining (OCR).
- Amortisation: Over time, your monthly payments gradually shift from being interest-heavy to principal-heavy. This is due to the reducing principal balance, which changes the interest calculation.
- Loan term: The length of time it takes to fully repay the loan depends on the loan term and your monthly payment amount. At the end of the loan term, assuming all payments have been made, the OCR becomes zero, indicating that the loan has been paid off.
Understanding the OCR is important because it affects the total interest you will pay over the decided tenure. The higher the OCR, the more interest you will have to pay, and vice versa. If you are considering making additional payments toward your home loan, it can help reduce the OCR and shorten the loan term, ultimately saving you on interest payments.
