With the rising interest rate environment, you’ve probably heard of other loan forms such as the equity term loan, also known as the home equity loan, cash-out refinancing, mortgage equity withdrawal loan, reverse mortgage, and so on.
If you’re looking to borrow a huge sum of money without going for a personal loan, you can consider a housing loan. This loan allows you to borrow against the value of your private property without selling it.
You can even achieve this while you’re still paying your mortgage. It’s a popular option for many Singaporeans to take out large sums of money using their homes as collateral, usually up to 75 per cent of the home’s value.
If you’re looking to learn more and how to best use it, this article explains what is equity in housing loan and more. Read on.
What Is Equity In Housing Loan?
In a nutshell, equity is the difference between how much you owe on your mortgage and how much the home is worth.
For many Singaporeans, home equity is one of the most valuable assets. In most instances, equity accumulates over time as you pay down your mortgage, the value of the home increases, or you increase value by making improvements. You can increase your home equity when:
- You make mortgage payments
- You make home improvements that raise the property’s value
- The property value increases
- You make a large downpayment
You can calculate the equity in your home by getting the property’s estimated current value and subtracting your mortgage balance.
What Is An Home Equity Loan Or Cash-Out Refinancing?
A home equity loan or cash-out refinancing is a secured loan that uses your property equity as collateral. For instance, if you have a fully paid-up home that you purchased at $850,000. Presently, however, its new, appreciated value is $1.2 million. You then decide to quit your job and start a business without selling your home to get the capital.
With a home equity loan in Singapore, you can borrow up to 75 percent of your home’s value, $900,000, without selling it. Your home will be used as the loan’s collateral with an extremely low-interest rate, often around 1.6% pa. This provides a huge sum of capital to work with a much lower interest rate than business loans which are upward of 6.5% pa.
You can also use your home’s equity if you’ve not completely paid for the property. If that’s not unpleasant, the following restrictions also apply:
Restrictions On A Home Equity Loan
Private Property Only
Home equity loans are unavailable on HDBs and only for private property. The lender carefully considers even private property. A fully-paid up property is your best bet, preferably one that has appreciated with time.
Home Equity Loan Limits
Unfortunately, you can’t borrow the entire value of your private property.
You first have to subtract the outstanding home loan plus any CPF used to purchase it. The ultimate amount you can take out is subject to the lender’s approval, up to 75%.
Eventually, you’ll be subject to general regulatory restrictions such as total debt servicing ratio TDSR.
Loan Application Costs
Getting a home equity loan is a rather complex and costly affair. You must pay several thousand dollars for the mandatory property valuation upfront.
It takes at least around two months to secure a homeequity loan, so it’s not ideal for emergency needs. Some lenders also charge fees for home equity loans.
Therefore, as you look for lenders, consider their annual percentage rate, which includes the interest rate and other fees.
You’ll probably pay higher interest rates if you include these costs in the loan.
Maximum Loan Tenure
The maximum loan tenure is either 35 years or until you reach the age of 75.
You Cannot Buy Another Home
The Monetary Authority of Singapore doesn’t allow borrowers to use a home equity loan to purchase another house. However, there are instances where borrowers have used it to pay off a second outstanding home loan.
Other restrictions include:
- Property must be occupied for at least 5 years
- Loan-to-value limits of 75%
- You cannot use your CPF funds to repay the loan
- Total debt servicing ratio requirements apply if your LTV remains less than 50%
Home Equity Loan Vs Equity Term Loan
Home equity loans and home equity lines of credit (HELOCs) are similar ways of borrowing money using the equity on your home.
A HELOC is a line of credit with a flexible interest rate, while a home equity loan is a lump sum that you pay in fixed installments. Both loans allow you to borrow up to 85% of your home’s value minus the outstanding mortgage balance.
The variable interest rate of a HELOC means the rate can decrease or increase, along with the monthly payments, at current times.
Some HELOCs have low introductory rates for a certain period, such as six months, and then change to a higher but variable rate. With a HELOC, you can use the funds, repay them, and borrow them again, just like with a credit card.
Pros Of A HELOC
- You’ll only pay the interest during the draw period, meaning your payments are more manageable than the fixed payments on a home equity loan.
- Like with a credit card, you do not have to use and repay all the funds you’ve qualified for. This makes a HELOC ideal for emergency cases.
- Some HELOCs have a conversion option allowing borrowers to put a fixed rate on some or all of their balance. This could help shield their budget from variable-rate increases.
- Simple access to funds
- Best for flexible borrowing
- Borrow only what you need
Cons Of A HELOC
- They have variable rates, meaning you’ll have to pay more in the rising-rate times. This could negatively affect your budget without proper planning.
- Many HELOCs have annual fees, which come with prepayment penalties, also called early termination or cancellation fees, when you pay sooner than the prepayment time dictates.
- You might lose your home to foreclosure if you fail to pay the line of credit.
Should You Get A Home Equity Loan?
Before getting a home equity loan, it’s important to consider the following factors.
Since the lenders hold your home as collateral and no one is willing to default on a loan that their home is collateral, home equity loans have very low interest rates.
However, giving your private home as collateral is not for the faint-hearted. If you fail to pay, you could easily lose your home without a roof over your head.
Depending on your financial needs, a home equity loan may or may not be feasible. Most borrowers use the loan to pay off existing debts or fund investments and new business ventures. You might need to consider a renovation or a personal loan instead for other reasons, such as weddings or home renovations.
A home equity loan is best if your property has increased in value. For instance, if you bought a $1 million home, and now it’s $2 million, you can crack some of the capital appreciation without selling the home.
Benefits Of Using a Home Equity Loan
Lower Interest Rates
Your property is the collateral for the home equity loan or line of credit. Therefore, these loans aren’t as risky as business or other financing forms.
As a result, they attract low-interest loans than unsecured loans like personal loans and credit cards. Home equity loans can help you improve your monthly cash flow and save on interest payments.
A home equity loan allows you to deduct the interest on the loan if the funds are used to purchase, build, or significantly improve the home.
How To Apply For A Home Equity Loan
Applying for a home equity loan can be cumbersome since the interest rates are usually not published online.
You must enquire at the various banks in person or by phone. At U Credit, we make the equity loan application easy for you. All you need to do is provide your details, and we’ll handle the rest.
We’ll check all the cash-out refinance Singapore options available and offer a recommendation that works best for you.
Should you decide to go on with your equity home loan, you’ll need to pay for a property valuation and an approved loan amount.
Is A Home Equity Loan Right For You?
A Singapore home equity loan or cash-out refinancing is one of the best ways to get funds out of your home without selling it or renting out rooms.
It provides a lump sum amount of money at very low interest rates. Use can use these funds for any purpose, but it’s best to plan the use to avoid losing a roof over your head.