If you are looking for a loan, you may have come across the term “equity term loan”. But what is it, exactly?
An equity term loan is a type of loan that gives Singaporeans the opportunity to borrow money against the value of their private property.
This option can be excellent for expanding your business, topping up your CPF account, or buying a new property.
In this blog post, we will discuss the pros and cons of an equity term loan, what to expect from the process, eligibility conditions, maximum amounts, and how to use your cash wisely.
What Is A Term Loan Or Equity Loan?
An equity loan, also known as cash-out refinancing, is a type of loan that allows you to borrow money against the value of your private property. The amount of money you can borrow will depend on the value of your property and your lender’s policies.
Equity loans are typically used for larger purchases, such as buying a new property or expanding your business.
The term “equity loan” is often used interchangeably with “term loan” in Singapore, though there is one massive difference to consider:
- Equity loans are taken after fully paying your current mortgage.
- Term loans are taken when you still have outstanding debt to repay.
Note: Equity and term loans are both secured loans, meaning you will have to use your property as collateral.
How To Check Your Eligibility
The only two essential eligibility conditions to check before applying for an equity term loan in Singapore are:
- You have private property you want to use as collateral. HDB apartments don’t qualify for this type of loan.
- You own an executive condominium (EC). In this case, you must ensure you are past the Minimum Occupancy Period (MOP) of five years. Only after this MOP will you be eligible for an equity loan.
Checking if you meet those eligibility conditions is simple. Either read your contract or contact a bank so it can review your current paperwork.
Factors To Consider
That said, here are a few other things to consider before you apply for a home equity loan in Singapore:
- Make sure that your property is fully paid off. If you still have a mortgage on your property, you will have to take out a term loan instead. Although this type of cash-out refinancing is similar to an equity home loan, you will qualify for a lower sum.
- Assess the value of your property. The amount you can borrow will be based on the value of your property, so it is important to have a realistic estimate of what your property is worth.
- Ensure the loan conditions are advantageous. Whether you are taking up an equity home loan or a term loan, you calculate the tenure by subtracting your age and the current home loan’s tenure from 75. For example, if you are 50 and took a bank loan for your existing property 10 years ago, the remaining term is 15 years.
Why is this condition important?
Longer tenures entail lower installments, which can fit more affordably into your budget. The drawback is that longer tenures mean that more interest will accumulate over this period.
Pros And Cons
Now that we’ve answered the question “what is an equity term loan?”, it’s time to discuss the pros and cons of cash-out refinancing in Singapore.
As with any financial decision, taking out an equity term loan has advantages and disadvantages, and you must understand both before making a decision.
- You can use the loan for any purpose, including business expansion, home improvement, or even investment purposes.
- The interest rates are typically lower than those of unsecured loans such as personal loans.
- Your monthly repayments may be tax-deductible if you use the loan for business purposes.
- Banks will be more likely to offer this type of loan if the value of your property has increased significantly since you first bought it.
- You cannot take an equity term loan for a HDB flat.
- You are putting your property at risk if you default on the loan.
- The sum you are getting may not be what you are hoping for, especially considering the associated fees, your existing loans, and your credit score.
- The bank determines the current market value of your property. You must do your research before choosing a lender. Be sure to consider all their loan conditions, from interest rates to loan tenures.
How Much Can You Cash Out?
If you fulfil the criteria, an equity term loan enables you to cash out around 70-80% of your current property’s value.
Let’s say you bought a $500,000 private apartment in 2006, and now this property is worth $800,000.
The bank loan covers 75% of your loan-to-value market value of $800,000, much as it did in 2006.
But now, that principal amount is calculated from a larger amount, so your eligible loan will be $600,000.
The Total Debt Servicing Ratio (TDSR) matters too.
The TDSR defines how much of your monthly income goes into repaying debts.
For example, if your monthly income is $12,000 and you are currently servicing a $2,000 car loan and a $2,000 personal loan installment, your TDSR is 33%.
This means that one-third of your monthly salary is going towards debt repayments.
The maximum TDSR in Singapore is 55%.
Therefore, in this situation, your equity term loan installment can’t be more than 22% of your gross monthly income.
If you can only pay $2,640 for your equity loan and your tenure is just 10 years, that decreases the maximum loan amount you qualify for to $316,800.
Warning: If your credit score is not good, the bank may offer you an even lower amount.
You will also have to deduct specific expenses from this amount:
- Your remaining loan, if you have not yet disbursed it.
- Any amount you still owe the CPF for the property you have bought.
So, if you still have $100,000 pending from your loan and have used $100,000 of your CPF for the downpayment or monthly mortgage, you may cash out just $116,800.
But if you don’t have any other installments or age-related tenure conditions, you can qualify for up to $400,000.
Then, of course, come the associated costs.
The bank will require payment for legal and valuation services, which are usually around $3,000-$4,000.
Note: Paying $4,000 out of $400,000 (as in our above example) for admin fees may be worthwhile because this money represents just 1% of your loan.
However, paying these admin fees may not be worth it if you are eligible for the lower amount of $116,800.
How Should You Use The Extra Cash?
The beauty of an equity term loan is that you can use the money for any purpose. You may want to invest in a new business venture, renovate your home, or even buy a new car.
However, it is important to remember that you are putting your property at risk if you default on the loan.
So ensure you are making the right decision. Purchasing a new car or going on an extravagant holiday may not be the best way to use an equity term loan.
Pro tip: Use the extra cash for something that increases your wealth in the long term or improves your current situation.
For example, you can consider this type of loan if you have lost your job or have been retrenched because the interest rates are very low.
You can also use the money wisely for launching a business (only after doing all feasibility research and a thorough business plan) or building a passive investment portfolio.
Weigh Your Options Well
An equity term loan can give you a financial cushion in difficult times or provide the funds needed for important investments. This type of loan has low interest rates and a long enough tenure, so it is much better than a personal or business loan.
But do your research before taking one out, and remember to use the money wisely.
And remember, if this loan’s conditions are not worth it, consider other options.
Lending Bee offers loans with higher interest rates but without the need to put your property at risk.
You can get a personal loan of up to $300,000 from us in just 24 hours. You only need clean credit history and income proof.
Besides, our business loans offer up to $2,000,000 with zero processing fees.
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.