If you need a large sum of money that you cannot get through a personal loan, you may consider an equity home loan. This financing solution allows you access to a considerable amount at a low-interest rate.
However, you must first understand what is equity in housing loan and how you can leverage that.
This article explains how you can borrow against your property, even if you have a preexisting mortgage. Keep reading below.
What Is Equity In Housing Loan?
Equity means ownership. Therefore, equity in a housing loan defines the part of your home which you own.
Let’s see an example:
You originally bought your home for $800,000. Now:
- The property is worth $1,000,000.
- You have $400,000 left to pay off the original housing loan.
That means your equity in your home is $600,000 because that is the part you actually own. As a result, the amount you can borrow will be calculated based on this amount.
Assuming your lender establishes your eligibility for a loan-to-value (LTV) limit of 70%, your principal loan amount will be 70% out of $600,000 = $420,000 for this equity loan.
This equity home loan seems like taking a second mortgage. In practice, both financing options work similarly, though home equity loans have a smaller interest rate.
And there are other distinctions between these two that we will analyse in a section below. But now:
What Is An Home Equity Loan Or Cash Out Refinancing?
Home equity loans come in different names, such as reverse mortgages, mortgage equity withdrawal loans, property equity financing, or cash out refinancing. All these terms mean one thing:
Secured loans in which your home equity is the collateral.
Basically, cash out refinancing in Singapore means borrowing money against your property. The more installments you reimburse, the more equity you get back.
These loans have specific conditions:
- The maximum loan tenure is 35 years: Or until you, the borrower, become 75 years old. The shortest of the two periods is considered the maximum tenure.
- You can only take cash out refinance in Singapore for private property, not HDB loans: Even so, you have the most chances of securing a convenient loan if your home is fully paid and costs more now than when you bought it.
- You must consider the loan-to-value (LTV) limit: We discussed this term in the previous example. Basically, the LTV defines the amount you can borrow based on the amount of equity remaining in the home. So, subtract the outstanding home loan and any outstanding CPF sum used for your original loan. Your lender will then calculate how much of this amount they can lend you, respecting the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).
- The TDSR defines the total loans you can have legally in Singapore: This rate is currently set at 55%. That means your total loan installments, including this cash out refinance, cannot represent over 55% of your gross earnings.
- The MSR defines the total mortgage loans you can legally have in this state: This rate is currently set at 30%. Therefore, your total Singapore home equity loans cannot represent over 30% of your gross income.
Home Equity Loan Vs Equity Term Loan
An equity loan and an equity term loan seem to define the same thing. However, they have different uses:
- An equity loan in Singapore defines money you borrow using your fully-paid home as collateral: That means you can use this property to guarantee another loan. This second loan does not have any restrictions. You can use it to pay for piano lessons, buy a vehicle, or consolidate preexisting debt.
- An equity term loan in Singapore entails borrowing money against your partially-paid home: In this case, you do not have full equity in your home. Therefore, you can borrow less money based on a lower LTV.
Similar features include:
- The maximum LTV represents 75% of your current home’s value.
- The maximum tenure is 35 years, depending on your current age.
- The minimum borrower’s age is 21 years old.
- You must have good credit.
- The minimum annual income set by some banks is $24,000/year.
- The interest rates are low, typically between 1% and 3%.
How Do You Get An Equity Term Loan?
How Much Is A Bridging Loan In Singapore?
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Should You Get A Home Equity Loan?
Getting a home equity loan is not a light decision, although it seems like getting access to easy money. The factors to consider are the following:
The equity housing loan has a low-risk level for your lender because you guarantee the loan with your property. However, that translates into a high risk for you.
If you default on your equity loan, you will lose your equity – aka your property.
Therefore, you should ensure you can fit its installments comfortably into your monthly budget before getting this loan.
Make sure you are taking this loan for the right reasons. Such reasons may include getting capital for a new business, debt consolidation, or massive home renovations.
In some cases, the equity loan can be justified.
For example, a home equity loan allows you to pay your existing loans, thus getting you debt-free quickly. That helps you improve your credit rating and become a trustworthy financial customer again.
But this solution is not ideal if you:
- Have small loans: Consider a debt consolidation loan, which is unsecured and thus cannot lead to your losing the property
- Have a debt problem: If you have accumulated past loans because of a lack of financial knowledge, it is best to consult a financial planner first. Credit Counselling Singapore is an excellent start.
Warning: The Monetary Authority of Singapore (MAS) has established that home equity loans cannot be used as a downpayment for purchasing a new property.
Here’s the catch:
You can use this type of loan to repay an outstanding term loan for another home if you have already bought it.
The best time to get a home equity loan is if your property costs more currently than when you bought it. Take, for example, a $1,000,000 condo. If that apartment is worth $1,500,000, you can use that appreciation in your favour.
Therefore, you can get more money based on the price increase without selling your property.
Fees And Timeline
Home equity loans may seem like easy money, but they are not. You also have to consider the following charges:
- Paperwork fees: $1,800-$2,000 nett
- Valuation fees: Depending on the bank and your property’s price
So applying for an equity home loan requires some upfront cash.
Then there is the waiting period:
Your application can take anywhere between two and four months to go through. Therefore, this type of loan is not best in emergency scenarios. Alternatively, do not delay this process if you need this cash quickly and feel this is the best solution for your needs.
Remember: Borrow the entire sum you need instead of skimping on money. Otherwise, you will have to go through the lengthy application process again if you need more money later.
How To Apply For A Home Equity Loan
Applying for a home equity loan is more challenging than other types of loans because:
- Banks do not publish their rates and conditions online: You must visit different banks to compare their conditions and choose the best-suited offer.
- You cannot apply online: You can only apply inperson at these banks.
After sending your application, you must pay the property valuation before receiving the offer.
Frequently Asked Questions
1. Can I Use CPF Funds To Reimburse My Home Equity Loan Installments?
No, you cannot use your CPF funds to repay your home equity loan. You may only use cash for this purpose.
2. Can I Refinance A Preexisting Equity Home Loan?
Yes, you can refinance an equity home loan to benefit from lower interest rates and get cash rewards or different rebates.
3. What Is A Home Equity Loan And Cash-Out Refinancing?
Home equity loans and cash-out refinancing loans define the same financing solutions. These loans entail using your equity as collateral for a secured loan. You will then reimburse monthly installments comprised of interest and principal.
4. Are There Any Interest-Only Home Equity Loans In Singapore?
There are no more interest-only equity loans or term loans in Singapore. These financing solutions entailed repaying just the interest during the first part of the loan and then reimbursing the principal. However, MAS deemed this solution unfair to people who can repay their loans early.
5. Can I Take An Equity Loan For A HDB Property?
No, you cannot take an equity loan for a HDB property. These loans can only use private properties as collateral. In this case, Credit 21 can help you with a slew of convenient packages, such as secured personal loans, business loans, or renovation loans.
Contact us to find out what we can offer and apply for a loan. Or use our free personal loan calculator here.