If you are wondering how to make money with your property, you could consider renting it or selling it. These are the popular ways of monetising a property in Singapore.
However, another option is an equity term loan. Taking advantage of an equity term loan can help you get the cash needed to cover several expenses and improve your financial situation.
With an equity term loan, you sell a part of your future home equity and receive a lump sum of cash in return. Not everyone will qualify, but for those who do, this can be an excellent way to access your home’s cash value without taking on a new housing loan.
This article will show you how to get an equity term loan in Singapore to get cash from your property.
A term loan or equity loan (also known as home equity loan) are different terms that describe the same type of loan.
The only variation between the two is that a home equity loan enables a borrower to obtain the loan on the value of a fully paid for property.
On the other hand, a term loan allows you to borrow on a property that is not yet fully paid for.
When borrowing a term loan, you are using the equity accumulated in your property as collateral for the loan. So if the value of your property has appreciated, your best alternative could be to borrow a home equity loan or term loan if you want to borrow money at a low-interest rate.
You can do this by assessing the current value of your property. If the property has appreciated enough since you purchased it, you can borrow on the increase in value and maintain your current loan.
This is also possible if you haven’t fully paid your loan. In a real sense, you would be borrowing off the fully paid portion of your home loan. This is known as a mortgage equity withdrawal loan or cash-out refinancing.
To qualify for a Singapore home equity loan, you must meet a certain eligibility criterion. You should meet the following requirements:
Before considering an equity term loan, you need to ask yourself these questions:
In Singapore, you are only eligible for an equity home loan if you have private property. Therefore, HDB flats are not eligible for this type of loan.
On HDB’s website, it states that one should not use their HDB flats that have been fully paid for as collateral to banks to raise credit facilities for private purposes.
But even if you own an EC, you have to wait for the five-year MOP to expire. You can take out an equity term loan on a property with an existing mortgage, so long as you borrow from the same bank.
You will have to abide by the normal mortgage rules that, when obtaining a home equity loan, you will be required to maintain a minimum loan-to-value (LTV) ratio of 25%. This indicates you can only get 75% of your property value, assuming it is fully paid.
How much you can cash out from the equity of your property is dependent on these three critical factors:
If you borrowed money from your CPF to finance your downpayment or monthly repayments
You are not allowed to cash out the CPF portion of your CPF equity – you cannot cash out any CPF savings used to pay for your home downpayment and monthly mortgage.
In other words, 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.
You are also required to abide by the Total Debt Servicing Ratio (TDSR), which states that your total monthly debts should not exceed 55% of your monthly income. But the TDSR is not applicable if you borrow up to 50% or less of your property value.
It doesn’t mean you should obtain a home equity loan just because it is one of the cheapest loans.
You have to consider your ability to repay the recurring monthly loan repayments subsequently.
If you are approaching retirement and prefer to start winding down in life, committing to a monthly loan repayment can be difficult when your income gradually dries up.
Conversely, obtaining a home equity loan can build your net worth if you have enough monthly cashflow and can make better use of a lump sum to invest.
While borrowing any loan, such as an equity term loan, expect charges such as legal and valuation fees to cost between $3,000 to $4,000.
These do not have to be paid upfront, but depending on the amount you want to cash out, it may or may not be worth it.
But one advantage of taking a home equity loan on an investment property is that you may get tax deductions.
But the interest rate of an equity term loan is usually low, at about 1-2%, as compared to 3-4% for renovation or education loans.
Apart from this, you need to maintain your monthly repayments on the home equity loan. If not, you risk having your property repossessed by the bank. You also cannot finance your home equity loan using your CPF funds.
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.
So if you are 45 years old and have already spent 15 years paying off your existing home loan, the loan tenure of your equity term loan will be calculated as 75 – 45 – 15 = 15 years.
However, some banks may calculate their loan tenures differently.
Whether an equity term loan or home equity loan is a good idea depends on your financial situation and your plans for the money.
Your home acts as collateral, which has risks, so it is important to weigh the pros and cons of a home equity loan carefully:
The advantage of this cash-out refinancing in Singapore is that you can use it for anything. That is, it cannot dictate what you can use the loan for.
However, being able to cash out large sums of cash has its risks and benefits. But how you utilise the funds will determine if you have made a good or bad financial decision.
If you use the money to buy a new car or travel, you may be spending cash on things you can’t afford.
These are not necessary, and you need to ask yourself whether you should spend large sums of your net worth on it while facing another long-term debt.
Here are some ways you can use the cash:
If you pay off high-interest unsecured personal loans or huge credit card debts with the money, you may save a lot of money.
But if you are considering using the money to start a business or invest in the stock market, you may be compelled to work on your money harder to get better returns compared to the interest you have to repay.
If you are experiencing challenges and need cash to maintain your and your family’s daily expenses, a home equity loan may be one of the cheapest options.
As mentioned above, the usual mortgage rules apply when applying for home equity loans. This means that you should meet the requirements of your LTV ratio of 25%.
Therefore, you are only allowed to cash out 75% of your property value, if it has been fully paid. You will not be allowed to cash out the CPF part of your property. Your cashing out is also subjected to TDSR stipulations.
Making cash out of your home sounds like a good idea, but all loans are similar, and it is not advisable to take on extra debt pointlessly.
Ensure you use the money responsibly since administrative expenses can be steep, and if you cannot manage your repayments, it may cause financial issues.
While you may see cash-out refinancing as a viable option, obtaining a home equity loan may be an overwhelming process.
You can consult CreditMaster, a trusted licensed money lender in Singapore that can offer you customised advice and loan packages.
You will be supported by our team of financial advisers who will also assist you in the tedious application process.