A home renovation can be a daunting task and a financial strain. So what do you do when your dreams for a perfect home are bigger than the piggy bank?
You consider a renovation loan to get that dream home, of course.
But even taking this loan can be a daunting task. After all, how does renovation loan work? We have you covered. We will explain everything about this loan’s features, how to choose the best one, and how to apply.
Keep reading below.
What Is A Home Renovation Loan?
A home renovation loan is a sum of money you borrow to do restoration or remodelling work in your home. For example, you can use a renovation loan to repair your wall or install fittings.
Renovation loans have some special conditions:
- You can borrow up to $30,000 or six times your monthly income – whichever is lower.
- The loan tenure to repay the loan balance is one to five years.
- The interest rate for your renovation loan will be much lower than that of a personal loan.
- The borrowed amount is disbursed to your contractor as a cashier’s order.
- You cannot use a renovation loan for some things, such as furniture or appliances. However, some legal money lenders have devised alternative packages to include these options as well.
- Only the homeowner can apply.
- The bank or legal lender may visit your home to see if the renovation loan is used accordingly.
What You Need To Know About Renovation Loans Singapore
As you can see, reno loans have significant particularities compared to other loans. Let’s analyse each feature so that you can be better prepared:
1. Interest Rates
The lowest current rate for renovation loans at banks is 3.88% per year, or the equivalent of an effective interest rate (EIR) of 4.29%.
Here is a sample from DBS Singapore’s current offer (notice it is not for a green renovation loan):
At an interest rate of 4.88% and three-year tenure, the monthly installment is $897.51.
Comparatively, licensed money lenders offer interest rates between 1-4% per month. Renovation loans are likely to benefit from the lowest rates, though. For a three-year term and 1% rate, your monthly installment will be $1,374.11.
Reno loans have lower interest than other unsecured loans because:
- The principal amounts are lower.
- The money will be spent according to a quotation and for a specific purpose (your renovation).
- The lender is allowed to visit the renovation site.
- Your contractor gets the money.
As a result, renovation loans are very low risk for banks and licensed money lenders.
2. Maximum Loan Singapore
When you take up a renovation loan, the maximum amount you can borrow is the lowest of these two numbers:
- Up to six times your monthly earnings
Let’s say you earn $4,000 per month. In this case, the maximum amount you qualify for is $24,000. If your income is $6,000 per month, the maximum renovation loan amount would be $30,000.
Here is the problem. On average, renovating a basic four-room HDB flat costs between $40,000 and $65,000.
- Apply to two renovation loans.
- Get a renovation loan from one provider and a personal loan from another provider.
Pro tip: Make sure these loans respect the Total Debt Servicing Ratio (TDSR) of 55%.
That figure means your total loan installments cannot represent over 55% of your gross income per month. If they do:
- Grade your renovation works in order of importance.
- Get a renovation loan that covers the most urgent repairs.
- Do these repairs and finish reimbursing the loan.
- Get another quote from your contractor and apply for a second reno loan subsequently.
3. Additional Charges
Banks can impose the following charges for a reno loan:
- Processing fees: 1% of your approved sum
- Late penalty fee: $80
- Early repayment fee: 1-2% of your remaining balance
- Cancellation fee: 1% of the approved loan amount
Warning: Banks can demand extra fees, especially if they have to send money to several contractors. DBS features an extra 1% insurance fee, which will repay the outstanding loan amount in case of the borrower’s death or total permanent disability.
Licensed money lenders have the following charges:
- Admin fee: Up to 10% of the approved sum. They usually do not charge as much for renovation loans
- Late penalty rate: Up to 4% of the missed installment
- Late penalty fee: Up to $60
4. Restriction On Purpose
You can only use home loans for renovation for the following works:
- Electrical and wiring
- Built-in cabinets
- Painting and redecorating
- Structural alterations
- External works within your home’s limits
- Flooring and tiling
- Basic bathroom fittings
Warning: The HDB has some particular rules regarding the time of day when you can do these renovations and how much noise you can make altogether.
Be sure to give them a read before starting your reno work.
Pro tip: Some legal money lenders have fewer restrictions in their reno loan packages. If you also want to use your reno loan for furniture or decorations, review their offers too.
5. Eligibility Criteria
Here are the requirements for your application to go through at a bank:
- Only Singapore citizens or permanent residents can apply.
- The borrower’s age should be between 21 and 65 years.
- The applicant’s minimum income is $24,000 per year. If you submit a joint application with your spouse, each of you must have a minimum income of $12,000 per year.
- The property owner must be the primary applicant
- People who send joint applications must live together and be related or married.
Licensed money lenders have much laxer conditions:
- You do not need a specific minimum income, although your total earnings will be considered when tailoring the loan conditions.
- Most legal lenders do not impose a maximum age.
How To Apply For A Renovation Loan In Singapore
Applying for a reno loan is easy enough. Just follow the steps below:
1. Calculate Your Amount
The first thing you have to do is determine how much money you need for your renovation projects.
- Consider all the necessary work with your contractor, and have them do a thorough quotation.
- Compare this sum with the maximum you are eligible for (six times your monthly income or $30,000).
This will help you decide if you will take two simultaneous or consecutive reno loans.
2. Choose Your Provider
Assess multiple loan providers, looking at their interest rates, additional fees, and eligibility conditions.
Pro tip: Most banks and legal lenders boast intuitive renovation loan calculators on their websites. Use these tools to calculate the potential monthly installments you would have to pay.
This will tell you which would be the best renovation loan for your needs.
3. Check Eligibility Conditions
Remember that banks in Singapore have more rigid conditions for your age and minimum annual income. So make sure you meet them.
Otherwise, your loan application will be rejected. And that means your credit rating will plummet, therefore lowering your chances of getting a convenient loan in the future.
4. Prepare Your Documents
The paperwork needed for your renovation loan application includes:
- Proof of identity (NRIC)
- The latest Assessment Notice from IRAS
- Computerised payslips for the past three months or CPF contribution statements for the past 12 months
- Your contractor’s quotation in original, signed by both of you
- Proof that you are the property’s owner
- Proof that your joint applicant (if they exist) is salaried
- Evidence of relationship in the case of sending a common application
5. Submit Your Loan Application
Once you have everything ready, you can submit your application either in person at the bank or money lender’s office, or online.
Online applications are fast; you will get a reply within the hour to let you know if your submission has gone through.
Remember: You still need to arrange a meeting at your lender’s office for due diligence.
They will check your paperwork, discuss your loan’s conditions and wire the money. Before signing on the dotted line, take the opportunity to clarify any misunderstandings.
Dream Home Renovation Loan Singapore
Now that you are here, you know how does renovation loan work. Use these details to make an informed decision about how much you are borrowing and from whom.
Lending Bee is here to help. We will tailor convenient loan packages for your needs, with the lowest interest rates on the market. Whether you need a renovation loan or any other financial solution, you can count on us.
Use our free personal loan calculator and you can see the convenient conditions we have with your own eyes.
About Ashley Sim
Calling herself a “professional multi-tasker”, Ashley worked as a relationship manager in a bank for five years. She left her job just before the pandemic happened and became a freelance writer for about a year. Now, she’s making the most of her love for writing and knowledge of the banking and financial industry in her role as a content marketing lead. She hopes to help people make better financial decisions through her content and campaigns.