If you’re looking to borrow a large sum of money, your options are often pretty limited. More accurately, your LEGAL options are limited. But if you own a property, there is a chance to “cash out” some of the property’s value. This is known as a term loan or equity loan. Now make no mistake that this isn’t necessarily the most accessible option for everyone in the market, and several conditions have to be present before a bank in Singapore will approve such a loan.
Property cooling measures that happened in 2013 affecting TDSR and LTVs on Singapore properties really killed “cash out” opportunities for many folks. Still, it remains a viable option for some to “unlock” the value appreciation on their properties, and here we show you how it’s done.
- What is a term loan or equity loan?
- Who is eligible for a home equity loan?
- How much can you get from a term loan or equity loan in Singapore?
- What is the loan tenure for a home equity loan in Singapore?
- Why should you get a home equity loan?
- What is the interest rate for term loan or equity loan?
- Here’s what you should know about home equity loan in Singapore
What is a term loan or equity loan?
Whether you call it a term loan, home equity loan or equity term loan, the definition is the same. A term loan is a type of loan where you use the equity of your property as collateral. If your property has increased in value over time, a home equity loan may be the best way to borrow some money at a low interest rate. You basically re-assess the value of your property at present day and if there has been a sufficient increase in value over what it was when you first bought it, you might be able to loan a portion of that increase in value on top of your existing loan.
You can also do this even if you haven’t paid off your home loan in full. In effect, you are borrowing from the portion of your property that is fully paid. This is known as cash out refinancing, or mortgage equity withdrawal loans. Yes, this is the ultimate ‘same same but different’.
Who is eligible for a home equity loan?
In Singapore, only owners of private property are eligible to take home equity loans. So, if your only property is an HDB flat, you won’t be eligible for cash out refinancing.
If you own an Executive Condominium, you have to wait till your Minimum Occupation Period of 5 years runs out before you can consider cash out refinancing.
If you still have an outstanding home loan, you can only get the home equity loan from the same bank you have taken the home loan from. So if you currently have an OCBC home loan, you can only get an OCBC home equity loan.
How much can you get from a term loan or equity loan in Singapore?
Typically, the bank will allow you to borrow up to 80% of your property value. But first you would need to minus any outstanding loan amounts, as well as any CPF used for the property purchase.
That’s right, this is not a cheat code to cash out your CPF savings. Nice try.
You will also be limited by the total debt servicing ratio (better known as TDSR), which means your loan repayments cannot be more than 60% of your monthly income.
However, since 2017, to cater especially to older Singaporeans who have retired, you will no longer be limited by the TDSR if you are borrowing 50% of your property value or less.
Here’s an illustration to make it clearer.
Mrs Kaur’s property is valued at $1.25 million, and she has an outstanding loan of $250,000. She has also used about $600,000 of her CPF to buy this property so far.
|80% of property valuation||80% x $1.25million = $1 million|
|Outstanding home loan||$250,000|
|CPF used for property purchase||$600,000|
|Maximum term loan||$1 million – $250,000 – $600,000 = $150,000|
If she wants to get a term loan, she is eligible to borrow up to $150,000. Because her total loan (i.e. the term loan + outstanding loan) is less than 50% of the property value, she doesn’t need to worry about TDSR. Not bad.
What is the loan tenure for a home equity loan in Singapore?
The maximum loan tenure is 75 years minus your current age.
That means, if you’re 45 years old, your maximum loan tenure is 30 years.
If you’re currently servicing a home loan, then you need to minus the number of years you’ve spent servicing the loan as well.
So, if you’re 45 years old, and you’ve been servicing your home loan for 20 years, then your maximum loan tenure is only 10 years.
Why should you get a home equity loan?
There are two main reasons to get a home equity loan.
- Low interest rate
- High loan amount
This makes it very ideal if you need a large sum of money to renovate your home, for startup capital, pay off outstanding debt or for higher education. In all these cases, the alternative options will have either higher interest rates, or a lower loan amount, or both.
You probably don’t want to get a home equity loan if you just want the spare cash to splurge on a luxury car, or a year-long trip around the world. We’ll explain why later.
What is the interest rate for term loan or equity loan?
Home equity loans typically have very low interest rates – around 1%+.
In comparison, renovation loans, business term loans, debt consolidation plans and education loans all charge significantly higher interest rates.
|Loan type||Interest Rate|
|Home equity loan||1%+|
|Renovation loan||2.98% – 5.8%|
|Business term loan||3.5% – 6%|
|Debt consolidation plan||4% – 6%|
|Education loan||4.5% – 5.88%|
You can borrow more with a term loan or equity loan
Most loans only allow you to borrow up to 4X your monthly salary. For the typical Singaporean, that means you can’t borrow more than $20,000 at a time. And because of the TDSR restriction, your total loan repayment amount cannot be more than 60% of your monthly income.
As we pointed out earlier, term loans and equity loans don’t have this restriction. You can easily borrow up to $50,000 or more if necessary. And you don’t have to worry about TDSR either!
Here’s what you should know about home equity loan in Singapore
Just in case you think you can just run out and get a big low-interest loan, here’s 4 things you need to pay attention to:
- There are high upfront costs involved
- Your home equity loan will not be approved immediately
- You cannot use your CPF to pay off the loan
- Your home is being used as collateral
Term loans or equity loans have high upfront costs
There are additional administrative and legal costs involved in property valuation. And unfortunately, because your loan amount is tied to the value of your home, this is compulsory. Expect to spend $2,000 to $3,000 upfront.
Do note that these admin and legal fees are charged every time you apply for a term loan or equity loan, so make sure you’re sure of how much you need to borrow before applying. The last thing you want is to be charged an extra $3,000 simply because you underestimated how much money you needed.
Home equity loans in Singapore take a while to process
Typically, a home equity loan takes the bank about 2 months to approve.
However, if you have an existing home loan with the bank, this can take longer! Expect to wait for at least 4 months.
A home equity loan is often not the best choice for emergency situations. Do plan ahead if you intend to take a home equity loan so that you don’t get caught in a desperate situation.
Your CPF savings cannot be used to repay the term loan or equity loan
Unlike a home loan, you won’t be able to repay the term loan or equity loan via your CPF savings. This means that your cashflow will be affected, even though home equity loans have low interest rates and long loan tenures. Do make sure you set aside enough funds to repay your home equity loan.
You’ll definitely want to avoid missing repayments on your equity loan, because the last point is also the most important.
Your home is being used as collateral
The reason why you can borrow so much money at such a low interest rate is because the consequences of not repaying the loan is high – you may lose the roof over your head.
If you default on your equity loan repayments, you are giving the bank the opportunity to initiate foreclosure. That means they have the right to seize your property and sell it in auction to recover their losses.
For this reason, you definitely don’t want to take a home equity loan for frivolous purposes. There’s no point getting a fancy Maserati if you’re going to end up living out of it.
If you’re not sure if you are eligible for a term loan or equity loan, give our MoneySmart mortgage specialists a call. They will provide you with a free consultation and answer any questions you may have about your property and the possibility of cash out refinancing.
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