Are you looking to grow your business or do you need funds to pay off your loans? If so, you might want to consider getting an equity term loan using your property.
An equity loan is offered at low interest rates unlike other loans. In addition, there are no restrictions as to how you can use this loan. This means you can use the funds for any purpose.
However, not everyone is eligible for an equity term loan. Why? Find out here.
What Is A Term Loan Or Equity Loan?
An equity term loan allows you to use the equity or value of your home as collateral. You pledge the property’s equity with a promise to repay the loan.
A term loan allows you to borrow against a property that is not fully paid for. An equity loan or home equity loan allows you to borrow against a property that has been fully paid for.
This is to say that with an equity term loan, you can pledge a property even with a pending home loan. This is because you are borrowing the amount you have already paid.
For example, let’s say your home is valued at $400,000, and you have successfully paid a mortgage of $280,000. You can borrow an equity loan that is worth $280,000.
This is also known as cash-out refinancing, mortgage equity withdrawal loans, or second mortgages.
However, in such a case, you can only borrow an equity loan from the same lender as your home loan.
The good thing about this type of loan is that it is offered at a relatively low interest rate of 1%+ . In addition, if your home’s value appreciates, you’ll have more equity, which will allow you to borrow a larger loan amount.
We will discuss how all this works for and against you later.
How To Check Your Eligibility
In summary, not every property owner in Singapore qualifies for an equity term loan. This is because only owners of private properties are eligible.
This means that those who only own HDB flats, will not be able to get an equity loan.
However, if you own an executive condominium (EC), you can be eligible for cash-out refinancing – but only if you have exhausted the five-year Minimum Occupation Period (MOP).
Other eligibility criteria and requirements include:
- Minimum loan-to-value (LTV) ratio of 75%
- Maximum loan tenure of 35 years
- The loan cannot be serviced with CPF funds
In addition, the Total Debt Servicing Ratio (TDSR) is applied, but only for borrowers in sole proprietorships, partnerships, or shell firms.
The TDSR however, will not be applicable if the Mortgage Equity Withdrawal Loans (MWLs) amount, when added to any other outstanding debt secured by the same property, represents 50% or less of the property’s current market value.
A fully repaid housing loan and an increase in the value of the property since the date of purchase will give you an upper hand when applying for this type of loan.
Besides your eligibility for cash-out refinancing in Singapore, other factors to consider before applying for an equity term loan include:
How Much Can You Cash Out?
The amount you can borrow for your equity term loan will be dependent on these three factors:
- 75% of current home value
- Outstanding home loan amount
- CPF amount used to purchase the home
In other words: 75% of current home value – outstanding home loan amount – CPF used for your home = the amount you can cash out.
For example, let’s say your current home value is $600,000. You can borrow an equity term loan worth 75% of $600,000, which will be $450,000.
You have an outstanding home loan amount of $150,000, and you used $100,000 of your CPF funds to finance the purchase of your home. Hence, the total amount you can cash out will be $450,000 -$150,000 – $100,000 = $200,000.
If you do not have any outstanding home loans, you’ll subtract the CPF funds you’ve used from your current home value.
Costs Of Getting An Equity Term Loan
Some of the costs of applying for an equity loan include:
- Legal fees ranging from $1,800 to $2,000
- Valuation fees charged according to the current property’s market value
- Monthly installments
The legal and valuation fees can total up to $4,000, which is relatively high.
You’ll also need to pay the monthly installments as directed in your loan contract. Remember that you cannot use your CPF funds to repay an equity term loan – you’ll have to use cash.
Therefore, despite the low interest rates charged on this loan, be sure you can afford to service it to the end.
Paying yet another monthly installment when you have other loans to finance or not-so-good finances can be a burden. As such, take some time to consider other loan alternatives before settling for an equity term loan.
But if you’re sure you can afford this loan, then getting it can be good for you as you can use it to build your investment portfolio or start a business.
How Should You Use The Extra Cash?
Referring to the example given earlier, the ability to cash out a whole $200,000 or $350,000 (if you don’t have an outstanding loan) can be thrilling.
Unlike other loans such as a renovation loan, your equity loan lender will not tell you how to use the loan. So it is up to you to make the better choice.
The better choice would be to use the cash to invest, or consolidate other loans and credit card debt.
Consolidating loans and debt with an equity loan can help you pay off high-interest unsecured loans and obligations. In the long run, paying off these debts can save you tons of money. Once you consolidate your other loans, you can focus on repaying the equity loan.
Use the loan for what is most urgent, and not unnecessary luxuries such as buying a new car.
If you need more information about an equity term loan before you apply for one, get in touch with us at Credit 21, and we’ll be glad to help.
Pros And Cons
Here are some of the advantages and disadvantages associated with an equity term loan.
Low Interest Rates
Cash-out refinancing is a great way to receive a substantial bank loan at the lowest interest rates of 1%+. The interest rate is lower compared to those of other loans, which charge 1-4% interest.
Furthermore, in Singapore, most loans only allow you to borrow up to four times your monthly salary, implying that a single loan is not likely to exceed more than $20,000.
Luckily, equity term loans do not have this limitation – in fact, you can borrow up to $100,000. This allows you to get your desired loan amount from a single application rather than borrow from multiple lenders.
Some loans in Singapore come with restrictions on how you should use them. A renovation loan, for example, cannot be used for any other purpose outside renovations. Even then, there are limits to the kinds of renovations you can do.
On the other hand, you can use an equity term loan in Singapore for anything you please.
Aftermath Of Delayed Payment
Equity term loans are offered at relatively low interest rates of 1%+. While this may seem to work in your favour, the cost of defaulting or delayed payment is high.
This is because you are likely to lose your home if you do not repay your loan. Your lender can easily sell the property to recover the loan.
In addition, once the property is sold off, it is unlikely you will get a big share of the sales proceeds. The cash will first be used to repay all other loans, including the equity loan, your outstanding home loan, and CPF funds used.
Delaying payment or defaulting will also result in a bad credit score that might affect your attempts to secure financing in future.
Restrictive Loan Terms
The terms of an equity home loan may not work in your favour. This is because only private property owners are eligible for such loans. Even so, those who are eligible may not necessarily get the loan.
Even if you do get the loan with an outstanding home loan, you will not get the property’s total value (100%). This is because your current home loan, CPF funds used to acquire the property, and the related fees will be subtracted from the final loan amount.
This means you’ll only get about 80% or even less of the property’s value, which may still be subject to other criteria such as the TDSR.
As per the earlier example, after the loans and CPF funds have been subtracted and you get a loan amount of $200,000, $4,000 of that will be used to cover the compulsory fees. In the end, you will get $196,000.
However, when repaying the loan, you will need to repay $200,000 as the principal amount, and the interest rates are applied for that amount – and not the final loan amount you got.
This loan is also not ideal for emergencies because the application, approval, and processing period can take up to two months.
Use Your Home To Pay Off Your Loans
Nevertheless, an equity term loan is a good option when you are looking to consolidate your loans. With the low interest rates and high loan amount offered, you could pay off all pending loans at once.
Alternatively, you can use the loan to build your business and investment portfolio.
However, before you apply for an equity term loan, beware of the risks of not repaying the loan –you can easily lose your home. As such, ensure you can service the loan within your means and use the funds for the right purpose.
If you are looking for a personal loan with low interest rates and flexible terms, consider applying with licensed money lender Credit 21. The application process is straightforward and approval is done within the hour.