For most of us, buying a home is a troublesome process.
However, the hassle of running from one bank to another to get a mortgage loan is merely the beginning.
Next comes renovating your abode so that it looks just the way you want it to. But nothing comes cheap these days.
For instance, constructing a nursery to welcome a newborn will come at a cost. If you don’t have enough savings on hand, you may need to get a renovation loan.
This guide will help you understand what a renovation loan is, how to apply for a renovation loan, and the factors to consider before applying for it.
You will also learn about the various types of renovation loans, how they differ from personal loans, and other details about the renovation loan application process.
What Is A Renovation Loan?
A renovation loan is explicitly intended for financing renovations of new and existing homes.
Assuming the loan is approved, a processing fee and insurance premium are payable and deducted from the loan quantum.
The insurance premium ensures that the insurance company will pay off the outstanding renovation loan balance in the occurrence of the applicant’s permanent disability or death.
Consequently, the bank issues a Cashier’s Order to the contractor to disburse the loan amount.
The bank can issue only four Cashier’s Orders, which will each incur a fee after the first. The nominated loan servicing account bears the cost.
Other charges of renovation loans include cancellation fees, pre-payment fees, and late payment fees.
Choosing a loan package that suits your preferences and financial status is wise so you can avoid the aforementioned fees.
If you’re wondering how to apply for a renovation loan, there are usually two types of renovation home loans based on the bank’s method of charging interest for the loan.
Monthly Rest Renovation Loans
Most renovation home loans in Singapore are monthly rest loans.
With monthly rest, the interest depends on the loan’s outstanding balance. As you gradually pay off the outstanding loan, the interest decreases.
In simpler terms, as the due balance reduces, so does the interest. Such loans benefit customers because they minimise their financial burden over time.
Nevertheless, they can be double-edged swords. Since the interest is assessed monthly, you’re liable to pay higher interest if you miss a timely payment.
Flat Rate Renovation Loans
Flat rate renovation home loans in Singapore seem comparatively more affordable at first.
In such loans, interest is calculated using the principal amount, and since it doesn’t change, neither does the interest.
But what this means is over the loan tenure, customers end up paying more than the total of a monthly rest renovation loan.
However, given that the interest is flat, late payments don’t incur an increase in interest. Regardless, the bank will charge you a fixed late fee for each late payment.
Note: Monthly rest packages are more affordable than flat rate renovation loans if the customer can repay consistently.
What To Consider Before Applying For A Renovation Loan In Singapore
If you don’t know how to apply for a renovation loan, start by approaching a legal and renowned bank in Singapore.
Loans can be significantly problematic when you can’t repay the outstanding balance and the interest that comes with them.
Therefore, carefully assess your economic situation before applying for a renovation loan.
1. Interest Rates
The primary factor for a borrower to consider while taking out a home loan is the interest rates.
It is a reasonable consideration because it can bring the total up to a few extra thousand dollars above the principal loan amount.
In addition, it’s worth noting that the monthly interest rate isn’t the same as the effective interest rate. So, you should always confirm the type of interest being advertised.
Banks sometimes offer lower interest rates over a given period, processing fee waivers and other promotional perks.
These offers serve to make the renovation loan more tempting. However, it’s good practice to do your calculations beforehand to ensure the interest is something you can pay.
2. Loan Quantum
Most banks have a cap on the renovation home loans in Singapore, either $30,000, or the equivalent of six months’ pay, whichever is lower.
For a few banks, such as Standard Chartered Bank (SCB), the maximum loan amount is capped at $25,000 or the equivalent of four months’ pay instead of the figure mentioned above.
Moreover, banks also have a minimum loan amount. Financial institutions insist on a minimum loan amount of $5,000, while a few others require the loans to be at least $10,000.
This is why you should look for a bank with a loan quantum range that suits your needs.
3. Fees
When you take out a loan, several fees or hidden charges are also included.
The most common fees are processing fees, insurance fees, late fees, and cancellation fees. In most cases, the processing fees are proportional to the loan amount.
So if you take a loan of $15,000, you might have to pay a percentage of the same. Usually, the peg revolves around 1%.
The bank also charges an admin fee if the loan needs to be divided into several Cashier’s Orders.
More importantly, all banks are known to charge a late fee for late payments of installments or interest.
Naturally, you should look for a renovation loan package that incurs the minimum charges.
4. Loan Provider
If you’ve already taken a home loan, you will benefit massively from resorting to the same loan provider for a renovation loan.
Statistically, returning to your home loan provider can help you save up to 0.5% on renovation loans.
In addition, customers should choose lenders that offer a smooth experience and adequate customer care. Check out CreditMaster for the most effortless loan application experience.
Criteria And Maximum Loan Amounts
To request a loan from banks in Singapore, borrowers must fulfil the following eligibility criteria:
- The loan applicant should either be a citizen or a permanent resident of Singapore.
- Applicants should be between 21 to 65 years of age.
- The property for which the application is being made should belong to the applicant or his or her relative. In the latter case, the applicant must have the owner’s consent.
- The minimum annual income of the applicant should be $24,000.
Warning: These criteria are based on most banks’ data in Singapore, which implies they are subject to change.
The maximum amount that you can borrow for a renovation loan would be the lower of the following:
- Six times of your monthly income
- $30,000
How To Apply For A Renovation Loan
Applying for a renovation loan in Singapore used to be time-consuming.
However, recent upgrades in technology make the whole process a lot less daunting.
Although the renovation application process is easy, you should follow the steps below to make the most of your time.
1. Calculate Your Budget
The first step is to estimate the budget. Know the maximum amount of money you are capable of borrowing and planning to spend on renovations
Several renovation budget calculators available online can assist you.
2. Ask The Contractor For A Quote
Once you’ve calculated a budget and verified your eligibility for a loan, look for interior designers and contractors.
It’s advisable to go for a contractor with an impressive portfolio and who can turn your vision into reality.
After getting a competent designer, ask for a quote from his vendors or reach out to third-party retailers.
3. Prepare The Documents
Before receiving the loan, you must submit a few documents for verification and background check purposes.
Generally, licensed money lenders ask for the following documents when processing a renovation loan in Singapore:
- Completed application forms
- Scanned or digital invoice or quotation signed by the contractor and applicant
- Income documents
- Copy of front and back of your NRIC (for mail-in or branch applications)
- Proof of ownership
- HDB or Management Corporation Strata Title (MCST) renovation permit (if applicable)
A licensed money lender like CreditMaster boasts an exceptionally safe and fast online verification process. You can fill up forms virtually and upload supporting documents online.
4. Apply For The Loan
Submit the necessary documents and wait for approval. You’ll receive a letter or an e-mail once the loan is approved.
Note: Only the contractor is entitled to the renovation loan payouts. This means you can’t cash out the loan and use it.
6 Differences Between Renovation Loans And Personal Loans
Loans can help borrowers deal with cash crunches quickly.
The most common loan type is a personal loan, which can be used to address emergencies or one-off financial obstacles.
Personal loans can serve a plethora of purposes, and home renovation is one of them. Hence, technically, you may think of a home renovation loan as a kind of personal loan.
However, the two have their fair share of differences.
1. Interest Rates
Home renovation loans tend to have lower interest rates compared to personal loans. On average, renovation loans are available at a rate of 3-4%, while personal loans levy interest of 3.5-11%.
2. Loan Quantum
You can borrow renovation loans of up to six times your monthly salary or around $30,000, whichever is lower.
On the other hand, you can get personal loans of up to eight to 10 times your monthly salary if you earn more than $120,000 annually.
In short, renovation loans have a lower cap than personal loans.
3. Loan Tenure
Depending on the bank, the loan tenure for personal loans can be more than seven years. In contrast, renovation loans usually must be paid off within five years.
A shorter loan tenure might throw some borrowers off, but it’s beneficial in the long run as the interest will be lower.
4. Processing Fees And Paperwork Required
Although renovation loans have lower processing fees than personal loans, they require more paperwork and documentation.
Generally, personal loans only require a few months’ worth of payslips, but renovation loans require contractors’ quotations and proof of ownership.
5. Usage
You can use a personal loan for anything you like, but you must only use a renovation loan for reconstruction purposes.
The renovations covered under renovation loans vary from one lender to another. We will talk about these later.
6. Availability
Personal loans are offered by most banks. However, looking for a legal lender that provides home renovation services might be difficult.
One such moneylending institution you can consider is CreditMaster. The licensed money lender provides home renovation loans at the most affordable rates.
What Can A Renovation Loan Be Used For?
Even if you now know how to apply for a renovation loan in Singapore, you need to be aware of the usage restrictions.
A renovation loan can only be used for the following:
- Basic bathroom fittings
- External works within the compound of the house
- Painting and redecorating works (e.g. wallpaper)
- Electrical and wiring works
- Built-in cabinets
- Flooring and tiling
- Structural alterations
However, a home renovation loan cannot be used for the following:
- Home entertainment systems
- Air-conditioning
- Refrigerator
- Furnishings
- Household appliances
- Washing machine
- Curtains
Determine How Much You Need Before You Apply For A Renovation Loan
One of the most effective ways to reduce the loan amount of the renovation loan is to renovate your home in phases.
After constructing the more critical parts of the house, you can move in, save up and plan for the next phase of renovation.
Although this might seem inconvenient, it can help you save a significant amount on interest.
In addition, you can cross out unnecessary renovation ideas and prioritise the more important ones.
Outsourcing raw materials, opting for more affordable alternatives, and going for ready-made items can also help.
Above all, it’s essential to spend only as much as you can repay. Also, be responsible while spending as the bank conducts regular site visits to ensure the renovation loan is being used properly.Contact CreditMaster for more information or apply for a renovation loan with us now.
