If you own a property in Singapore, did you know that you can cash out its equity by borrowing against it?
This type of loan is what is called an equity term loan, a term loan, an equity home loan, or cash-out refinancing.
If your property has appreciated in value over the years, you are likely living in a goldmine whose value you haven’t tapped.
As such, you can use your property as collateral to borrow funds that can be used in a lot of ways.
But how do you get an equity term loan? What is the interest rate, and how much can you borrow?
Keep reading to find out everything about an equity term loan, and how you can tap into the value of your property.
What Is A Term Loan Or Equity Loan?
A term loan or equity loan is the same type of loan, but slightly different. We’ll explain why.
A term loan allows you to borrow against a property that is not fully paid for. An equity loan or home equity loan allows you to borrow against a property that has been fully paid for.
When you buy a home, the value of the property increases over time. This increase in value is referred to as equity.
With an equity term loan, you’re actually borrowing against the equity that has accumulated over time.
To know the current value of your property, you have to employ the services of property valuators, who are professionals in determining the current value of a property.
Often, the bank or loan provider you’re borrowing from will provide you with a property valuation before you are granted the term loan or equity home loan.
How To Check Your Eligibility
To be eligible for an equity loan or cash-out refinancing in Singapore, you need to own a private property that has been fully paid for – or not.
You can also be eligible if you own an executive condominium (EC) and have reached the Minimum Occupation Period (MOP) of five years.
HDB homes – whether fully paid for or not – aren’t eligible for equity term loans.
So if you have an HDB property, you cannot apply for a term loan. However, you can do so in the future when you upgrade to a private property.
Keep in mind that if your property has been fully paid for, you can take out an equity term loan from any bank.
But if your property isn’t fully paid for yet, you have to take out a loan from your current bank that is giving you the home mortgage.
How Much Can You Cash Out?
How much you can cash out from the equity of your property is dependent on these three critical factors:
- The loan-to-value (LTV) ratio the bank is willing to give you. This ranges anywhere between 70-80%
- If your home loan or mortgage is fully paid for
- If you borrowed money from your CPF to finance your downpayment or monthly repayments
This simply means that the amount of equity loan that can be advanced to you is the LTV percentage of your property value, minus the existing home loan and CPF housing withdrawals.
For example, let’s say Mr Ang bought a property in 2019 worth $1 million.
- As of 2022, the property has increased in value to $1.7 million dollars
- The bank LTV is 75%
- The existing home loan is $400,000
- CPF withdrawals for housing amount to $600,000
The term loan amount that Mr Ang can borrow is $275,000.
This is calculated as 75% LTV of $1,700,000 – $400,000 – $600,000 = $275,000.
Another important factor that significantly determines how much you can borrow is your total debt servicing ratio (TDSR), which restricts your monthly loan repayments to 55% of your monthly income.
Banks will take this into consideration when determining how much equity home loan or term loan you can borrow.
However, if you’re borrowing on half or less of your property’s value, the TDSR will not apply.
Factors To Consider When Getting An Equity Term Loan
Now you know how to get an equity term loan, and how much you can cash out, here are four crucial factors to consider before getting an equity term loan in Singapore.
Equity Or Term Loan Interest Rate And Fees
Equity term loans come at very low interest rates within the range of 1-2%, compared to other loans such as renovation or education loans with interest as high as 3-4%.
This is because equity term loans are just like home loans, and the interest is fixed or floating.
However, regardless of how low the interest rate is, interest is interest, and you still have to service it every month, along with a portion of the principal.
When it comes to fees associated with equity term loans, this can vary from bank to bank.
Administrative fees, including legal and valuation costs, can range anywhere from $3,000 to $4,000 although you do not have to pay these fees upfront.
Equity Term Loan Tenure
This is the number of years that is available for you to pay off your loan.
The tenure for a term loan or home equity loan is 75 years minus your age and the number of years you have spent paying your home loan.
Let’s say Mr Ang is 45 years old and has already spent 15 years paying off his existing home loan.
If he wishes to borrow an equity term loan, his loan tenure will be 15 years.
This is calculated as 75 – 45 – 15 = 15.
However, this can vary as banks calculate their tenures differently.
Your Ability To Repay The Loan
This is crucial when considering getting any type of loan. However, for equity term loans, the risk is higher as your property is used as collateral.
This means if for any reason you default, your property can be liquidated and you would lose the roof over your family’s head.
Also, note that you cannot use your CPF to repay your equity home loan.
How You Can Use The Loan
You need to be clear about what you can do with the cash you now have.
For instance, you cannot use the equity loan to purchase any property, however, you can use it for investments or pay off a loan.
We’ll talk more about what you can use the cash for shortly.
Pros And Cons
We would advise you to consider the pros and cons before you get an equity term loan in Singapore. The following are the benefits and drawbacks of a term loan.
- Taps the value of your property: Equity loans or term loans allow you to easily use your property to borrow money to meet your needs.
- Low interest rate: With a low interest rate of 1-2%, you can easily pay back your loan without spending a lot on interest payments compared to other loan types.
- Potential tax benefits: You can rake in some tax savings if you borrow a term loan for home improvements. Plus, the improvements will increase the value of your property. It’s best that you talk to a tax advisor about this.
- Possible long repayment period: Depending on your age, and the number of years you have spent paying off your home loan, you can get up to 20 to 30 years to repay your loan.
- Possibility of losing your home: Since your home is being used as collateral, you can lose it if you default in repaying the loan.
- Potential of misusing the funds: As you’re receiving the loan amount as a lump sum, you might spend it on something that wasn’t the reason why you applied for the loan in the first place.
- Potential to owe more than it’s worth: Your equity loan is advanced to you based on the current value of your home. However, if there is a crash in the housing market or your neighbourhood becomes less attractive to buyers, the value of your home can go down, making it harder to sell.
- Long application process: unlike other loan types such as personal loans, home equity loans can take longer to get approved. This can range anywhere from two to four months.
How Should You Use The Extra Cash?
Knowing how to get an equity term loan doesn’t mean the loan can be used in any manner.
As we mentioned earlier, you cannot use your equity loan to purchase a new property.
However, you can use the extra cash in the following ways:
If you have investments that you can undertake, and that will give you a better return on investment, taking out a home equity loan can help fund the investment.
You can use the cash from your equity loan to consolidate high-interest debt such as personal loans and credit card debts at a cheaper interest rate.
Education Cost, Wedding Costs, And Others
Taking out a term loan to fund education costs outside of Singapore, or wedding costs might work. However, you have to be careful that you aren’t spending frivolously and that you can repay your loan.
You can use the extra cash to renovate your property, which adds more value to the property. The interest is also cheaper than renovation loans.
Think About Whether An Equity Term Loan Is Right For You
If you have been thinking about how to get an equity term loan, we have covered everything you need to know in this article.
You have to weigh your choices, as well as the pros and cons, to determine if an equity term loan is right for you.
However, if your equity term loan application is rejected, or you need a quick personal loan to fund your needs, check out U Credit.
We are a licensed money lender in Singapore that offers fast loans at cheap interest rates.