If you need to take out a significant loan without it necessarily being a personal loan, get a home equity loan. Many Singaporeans have not heard much about it and often ask about its kind of loan, what is needed to apply for it, and how they can get it without risking their homes.
We delve into more details about a Singapore home equity loan and start by answering the fundamental question asked: what is equity in housing loan?
We tell you how to ‘unlock’ the value of your property and how to use it to your advantage to start a business, buy a car, or meet other financial obligations.
What Is Equity In Housing Loan?
Before we get on to explaining how you can get an equity term loan in Singapore, let’s answer one of the most searched questions on search engines in Singapore: “What is equity in housing loan?”
Your equity in a home loan is the value of your home that you control against the value retained by your mortgage loan lender.
For example, if your home is worth $200,000 and you owe $160,000 on your mortgage loan, the difference of $40,000 is the equity you have in your home.
Your equity increases as you pay down your mortgage loan. A rise in the value of your home as real estate prices change could also make your equity jump upwards.
However, if the property’s value falls faster than the rate at which you pay down what you owe, your equity also falls.Home equity is not only a measure of the mortgage loan paid off; it’s also an asset you, as a homeowner, can borrow against to get money.
The advantage of a home taking out an equity home loan over a personal loan or using a credit card is that the equity-based loan typically has a lower interest rate. Also, if you use the loan money to improve your home, the interest charged on this loan is generally tax deductible.
What Is An Home Equity Loan Or Cash-Out Refinancing?
Having answered “What is equity in housing loan?” we now define a home equity loan.
A home equity loan is a loan that utilises the equity you have on your property as collateral or security for your new loan.
Other terms you may hear referring to this loan type are cash out refinance, property financing, reverse mortgage, equity home loan, term loan, or even a second mortgage. The more you pay off the mortgage, the greater your equity or ownership. So, when you borrow your loan, you will be borrowing against your home ownership.
Unfortunately, cash out refinancing in Singapore is not available to HDB flat owners. Only owners of private property can access the loan, and even then, the lenders are careful to make some special considerations before issuing the money.
You stand a better chance of having your term loan approved if your property is fully paid for and, preferably, has appreciated its value in recent years.
Know also that there are limits to the amount you can get in your application. First, you must subtract the CPF deposit paid at the purchase and your outstanding home loan against the value of your home.
The amount you get after that is what is subject to consideration, and you get only a percentage of it, subject to regulatory limits like your total debt servicing ratio.
For example, when you apply for cash out refinancing in Singapore, with your property as the collateral, you can get up to 75% of the home value.
Let’s say you previously bought your home at $800,000, and it’s now valued at $1000,000, and you can apply for a loan of up to 75% of the appreciated value, $200,000. With this loan, you maintain the minimum 25% loan-to-value ratio, less the amount you drew from the CPF account during the property purchase.
The same would be the case if you had fully paid your mortgage loan and your home is now valued at $1 million.
A cash out refinance in Singapore allows you to borrow up to 75% of the $ 1 million (750,000), and you do not have to sell your house. A loan like this would come in handy when you want to change your career or make other big moves in life.
Cash out refinance in Singapore is preferred because it is one of the most affordable. Its interest rate is very low, often about 1% annually, with a tenure of up to 30 years, unlike home loans whose interests range from 2-3% per annum or regular business loans whose interest rates go upward of 6.5%.
Personal loans are even more expensive, with interests of about 8% annually. As such, the home equity loan in Singapore is more affordable and may be a better option.
We must warn you know that getting cash out refinancingin Singapore can be prolonged, cumbersome, and expensive. It includes a compulsory upfront property valuation and some legal fees that could cost you several thousand dollars. Also know that it may take you around 60 days to secure the loan. So this loan may not be suitable for when you need money for emergencies.
Home Equity Loan Vs Home Loan
The terms home equity loan and home loan appear to refer to the same thing, but these are two different loan types.
You can use a Singapore home equity loan for anything like medical bills, education, and home renovations, while a home loan in Singapore is only meant to help you to procure a new home. But the two have some similarities.
They are both mortgage equity withdrawal loans that offer a maximum financing of up to 75% of your property value and a maximum tenure of 30 to 35 years.
Like a home equity loan, a home loan has a relatively low interest rate attached, averaging between 1%-3% for either the floating or fixed packages. Home loans are also secured loans, with your home being the collateral.
But note that to qualify for a home loan, you must have good credit, have a $24,000 minimum annual income, and be 21 years or older.
Should You Get A Home Equity Loan?
Yes, you should get a home equity loan, but only after making the following three considerations. If your reasons for taking the loan check against the three, the home equity loan is worth taking.
1. Loan Purpose
Does it make sense to take out the amount you are asking for, and what do you intend to use it for? Most Singaporeans use their home equity loans to start new business ventures or pay off high-interest debts. If your purpose makes sense, go ahead and apply for the loan.
2. Level Of Risk
With your home being the collateral, your home equity term loan will have a low interest rate, but this does not eliminate your risk of losing your home if you default on your loan.
So in fear that they may not faithfully make their payments, many people are unwilling to offer their homes as collateral. Depending on your risk tolerance, you may take the loan or avoid it.
3. Value Of Your Property
It’s best to take out a Singapore home equity term loan when the value of your home has appreciated because then, you get to unlock the capital appreciation without risking too much or selling your apartment.
How To Apply For A Home Equity Loan
Applying for a home equity loan in Singapore from banks can be a hectic and prolonged process because, typically, banks don’t publish their loan packages and interest rates online. You may have to visit the banks in-person or make enquiries through phone calls, asking about their loan offers.
Lending Bee has earned an unparalleled reputation in the Singapore money lending market for our responsiveness, direct approach, flexibility, partnership, and warm experience our customers have had with us. We are worthy partners in your credit journey because we walk with you the entire process with kindness and understanding, from loan application to disbursement and the repayment process.
Consider taking a loan with us and become a recipient of our generous loans and repayment terms.
Frequently Asked Questions
What’s The Maximum I Can Get On A Home Equity Loan?
The maximum amount a lender can offer depends on the value of your property, less your outstanding mortgage debt, and the CPF. But, still, you can only get about 75% of the remaining value. Note that only private properties are eligible for home equity loans, not HDB flats.
What Are The Risks Of Taking A Home Equity Loan?
A home equity loan has one major drawback: by placing your property as collateral, you risk your property ownership. This is especially a significant risk if the property you offered is where you or your family lives.
Another drawback of all loans is that they reduce your monthly cash flow. The more you got to pay each month, the less the amount available for you and your family’s use.
What Happens If I Cannot Repay An Equity Loan?
The lender can foreclose on your property if you cannot repay a term loan in Singapore through the stipulated monthly payments, over the loan tenure.
So ensure that you keep up with the payments and you will recover your equity faster.
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.