If you’re a card player, you know what it means to “cash out.” It’s when you collect your winnings and exit the game. OK, so maybe there’s a bit more to it than that. Cashing out usually comes after your pride has been shattered and your wallet has been drained completely.
Thankfully, “cash-out” refinancing isn’t as traumatic as having to cash out from a Resorts World Sentosa (RWS) poker table. In fact, cash-out refinancing can provide you with thousands of dollars that you already have safely locked up! Not in your bank, but in your most valuable asset – your home.
What Is Cash-Out Refinancing?
In short, cash-out refinancing involves remortgaging your property with an additional loan. These “cash-out” funds can then be used for purchases ranging from financial emergencies to luxury items and holidays. If you own an HDB flat, unfortunately you can’t cash-out refinance.
If you own a private property and are still making loan repayments on it, you can tap into your home’s equity with cash-out refinancing.
A great thing about cash-out refinancing is that it’s the cheapest form of financing available because you’re using your property as collateral.
So how good are the interest rates?
Consider that renovation loan rates are quite low at 4-5%. Cash-out refinancing rates on the other hand are at about 1%+.
Reasons for Cash-Out Refinancing
Cash-out refinancing can be an easy way to get the money you need to make purchases that’ll either grow your cash-out funds (“growing” your money with a trip to MBS is NOT a good reason), or cover emergency expenses.
There are plenty of good reasons to tap into the equity of your home with cash-out refinancing. Here are a few to consider:
- Improve your home with new renovations and furnishings
- Free up capital for investment (property, stocks, bonds, etc.)
- Free up capital to start a business or expand your existing business
- Consolidate debt (auto loans, personal loans, student loans, credit cards)
- Finance the tuition fees of family members
- Pay for medical expenses
- Purchase a car
You can also use cash-out refinancing to free up enough money to take a holiday in Bhutan or purchase that $20,000 luxury bag you’ve been drooling over.
It’s not wrong to use some your cash-out funds for “personal” spending, but if that’s all you’re going to use it on, you’re better off taking a personal loan for a smaller amount. That way you’re not tempted to blow tens of thousands of dollars on items you’ll regret purchasing.
How Much Can I Get With Cash-Out Refinancing?
Cash-out financing works a bit differently in Singapore than in other nations, primarily because Central Provident Fund (CPF) contributions have to be factored into the equation.
Let’s say you owe $300,000 on a home that’s now worth $900,000, and you’ve used $100,000 in CPF towards your home loan repayments.
Here’s how your cash-out refinancing deal will look like:
A (60-80% of the property’s market value)
– B (Outstanding Loan Amount)
– C (CPF used for property purchase)
= Total Cash-Out Funds Available
Let’s assume that the bank agrees to lend you 70% based on your home’s value of $900,000. 70% of your current home value ($630,000), minus your outstanding loan ($300,000), minus your CPF usage of ($100,000) equals a cash-out maximum of $230,000.
Here’s what the calculation looks like:
– B ($300,000)
– C ($100,000)
I know you’re probably wondering how the banks determine the percentage of your property’s market value for cash-out refinancing.
Here’s how they do it:
- If you don’t have any other housing loans on other properties, then the bank will lend you up to 80% of your property’s current market value.
- If you have other existing housing loans on other properties, the bank will only lend you a maximum of up to 60%.
What to Consider Before Cash-Out Refinancing
Cash-out refinancing isn’t without terms and fees – it’s a loan after all. There are many things to consider before applying for cash-out refinancing, especially when it comes to the planning how much you want to borrow and how long you need to pay it off.
Here are the biggest things to consider before you cash-out:
- Your maximum loan tenure is 75 years minus your current age, minus the number of years you’ve spend servicing the loan (ex. 75-45-10= loan tenure of 20 years).
- You’ll need to plan your repayment timeline (ex. you use cash-out refinancing to expand your business, you’ll need to determine how many you need to pay it back, whether it’s 5 or 10 years based on your projected ROI).
- You’ll need to keep in mind that it can take 2-3 months for your cash-out refinancing deal to fall through, as it’s not like taking out a quick personal loan.
- You’ll need to pay for the legal and valuation fees, which can cost up to $3,000.
- You’ll need to consider your cash-out amount carefully (ex. making sure you take enough money the first time, otherwise you’ll need to pay legal fees again in the future when you need to cash-out for more money).
- You can only use cash for your loan repayment, as CPF funds aren’t allowed to be used.
Don’t worry, applying for cash-out refinancing isn’t that scary, especially when you have experienced professionals guiding you through the process for free. Visit MoneySmart to get free expert advice on finding the best possible cash-out refinancing deal possible.
Have you ever used cash-out refinancing to free up extra cash? Tell us about it here!