How To Get Cash Out of Your Private Property in Singapore
23 MARCH 2020
Getting cash out of your property with a home equity loan is a great way to get much needed capital for your business or your investment portfolio.
Unfortunately, you might not be able to get as much as you need if you try getting a home equity loan on your own.
With the help of our knowledgeable Mortgage Specialists, you can be confident that you’ll be getting the highest cash out amount at the lowest interest rates.
What is a term loan or home equity loan?
A term loan, home equity loan or equity term loan means the same thing. When you take a term loan, you use the equity of your property as collateral. So 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.
How this is done is that 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.
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. For instance, if you currently have an OCBC home loan, you can only get an OCBC home equity loan.
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.
How much can you borrow on a term loan or home equity loan in Singapore?
Typically, the bank will allow you to borrow up to 75% 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 $1.5 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.
Property Value: $1,500,000
75% of $1,500,000 (Property Value) = $1,125,000
Outstanding Loan: $250,000
CPF used for property: $600,000
Maximum Term Loan: $1,125,000 – $250,000 – $600,000 = $275,000
If she wants to get a term loan, she is eligible to borrow up to $275,000. 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.
Should you get a home equity loan?
If you need a large sum of money to renovate your home, get startup capital, or finance your child’s higher education, a home equity loan is quite ideal as the interest rates are low and you can get quite a high loan amount.
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.
You can borrow more with a term loan or home 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 (provided the bank approves of the loan).
Other FAQs about getting term loans in Singapore
Just in case you think you can just run out and get a big low-interest loan, here’s other FAQs you need to pay attention to.
1. What are the other costs involved in getting a home equity loan?
Term loans or home equity loans have high upfront costs. There are additional administrative and legal costs involved in property valuation, ranging between $2,000 and $3,000. And unfortunately, because your loan amount is tied to the value of your home, this is compulsory. These admin and legal fees are charged every time you apply for a term loan or home equity loan, so be sure of the amount you need to borrow before you apply. The last thing you want is to be charged an extra $3,000 simply because you underestimated how much money you needed.
2. How long does it take to approve a home equity loan?
Home equity loans takes pretty long (about 2 months) to be approved. Usually, it takes about 2 months, but if you have an existing home loan with a bank, this can take up to 4 months. So a home equity loan is definitely not suitable for emergencies.
3. Can I use CPF to pay off my home equity loan?
You cannot use your CPF to pay off the 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.
4. Why are the interest rates for home equity loan so low?
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. Definitely do not miss repayments as you may give the bank the opportunity to initiate foreclosure, which means that they have the right to seize your property and sell it in an auction to recover their losses.
For these reasons, 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 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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