How Do You Get An Equity Term Loan?
With interest rates increasing in Singapore, you may have heard of other loan types, such as the equity term loan, also referred to as the home equity loan or a term loan.
So what is an equity term loan exactly? How do you apply for one, and how can you use it for property investment?
You can obtain a term loan in Singapore or home equity loan by using the value of a property as collateral if you own one and need to borrow a sizeable sum of money.
Continue reading to find out how to acquire an equity term loan, and get the answers to the most commonly asked questions about this type of loan.
What Is A Term Loan Or Equity Home Loan?
With a home equity loan in Singapore, you can borrow money as a homeowner by leveraging the equity in your home.
The gradual increase in value of a property over time is referred to as equity.
It refers to the value of your financial interest in your home for a property that has been fully paid for.
Hence, a home equity loan might be the most advantageous way to take out loans at a low interest rate if your property’s value has increased over time.
An equity home loan is insured by your property and may be used to pay off debt or cover significant expenses such as home renovations, tuition, or the cost of a vehicle.
The term loan is disbursed in one single payment and repaid over time using a repayment schedule, with the interest rates and the monthly payments as fixed variables.
If you are thinking of getting an equity term loan, the first thing to do is to reassess the value of your home.
If there has been a significant increase in its worth from when you first purchased it, you can borrow a fraction of its value on top of your current loan.
Even if you haven’t wholly repaid your mortgage yet, you can still do this.
This is because you are, in reality, borrowing against the completely paid fraction of your property – also referred to as a cash-out refinancing or mortgage equity withdrawal loan.
How To Check Your Eligibility For A Home Equity Loan
Only privately owned properties in Singapore are eligible for home equity loans. Home equity loans are not available for HDB apartments.
The HDB website clarifies that you cannot use your fully paid for HDB flat as collateral when seeking private credit from banks.
You also won’t be qualified for any home equity loan in Singapore if you possess an executive condominium (EC) until you’ve fulfilled your five-year minimum occupancy period (MOP).
If you own a home with a mortgage, you can get a home equity loan if you use the same bank.
What Are The Uses Of An Equity Term Loan?
A well-renovated home might increase its perceived value and spark more interest from prospective buyers. When you decide to sell your home in the future, a nicely refurbished home is likely to stand out among the sea of listings on real estate portals.
Consolidating debt with higher interest rates into one loan with lower interest rates is another way to use your home equity loan to plan your debt repayment.
You should consider that by doing so, you are converting your unsecured debt into secured debt, guaranteed by your home, which serves as collateral if you cease making payments.
Business, Wedding, Or Educational Costs
It is worth noting that local banks provide interest-free loans while students are enrolled. Therefore, using a home equity loan to pay for local university expenses might not make sense.
However, it is a different story altogether for Singaporeans who are going abroad for university.
Using home equity loans to fund education may be more financially prudent, given the high interest rates for loans for overseas study stints.
The same approach can be used to get an affordable loan with higher lending rates, such as wedding and business loans.
It is important to note that home equity loans cannot buy additional real estate.
However, some have gotten around this by investing their extra funds in the stock market or other real estate types.
Factors To Consider Before Getting A Home Equity Loan
A home equity loan in Singapore may or may not sound right, depending on why you require that amount of money.
Borrowers often use the money to finance new business endeavours or investments, but some also use it to settle an existing debt.
Instead, you might want to consider getting a private loan or a renovation loan for your wedding or home renovation.
A home equity loan might be especially appropriate if your home’s value has increased.
For instance, if you purchased a condo unit for $1 million and if it is now worth $2 million, you can now access some capital growth without selling the apartment.
Given that the bank is holding your property as collateral, home equity loans have meagre interest rates.
When their homes are on the line, very few individuals are willing to let their loans go into default.
That said, not everyone should or can use their homes as collateral. After all, you could lose your home if you are unable to repay the loan.
How Much Can You Cash Out In Singapore Through A Term Loan Or Home Equity Loan?
It typically depends on the three things listed below:
- Up to 80% of your home’s current market value
- How much of your current mortgage, if any, that you still owe
- Total of your CPF withdrawals for your property purchase
It is crucial to note that disbursement charges differ.
In addition, you are constrained by the total debt servicing ratio (TDSR), which states that your loan repayments cannot exceed 55% of your monthly income.
However, as of 2017, if one is going to borrow 50% of their asset value or less, they are no longer subject to the TDSR restrictions.
This is done in part to serve elderly Singaporeans who have retired.
Pros And Cons Of Cash-Out Refinancing In Singapore
Most Affordable Loans Available
The annual interest rate for a cash-out refinancing ranges from 1.3-1.6%., which is a lot less than the majority of large loans.
For instance, the interest rate on a personal or business loan is higher than 6%. As such, some use cash-out refinancing to consolidate their debts and pay them off because of the low interest rate.
Huge Loan Amount
Suppose you need a sizeable sum to pay off your debt, start a business, or send your kids to an international university.
In that case, cash-out refinancing is your safest alternative. The need to take out numerous smaller loans at higher interest rates is less.
Unlock The Property’s Cash Value Without Selling
Selling your home isn’t always an option. Perhaps you can’t handle it emotionally, have to remain close to dependents, or your kids stand a good chance of attending a nearby school.
In that case, cash-out refinancing is your only remaining option if you’re not going to sell your home or rent out any rooms.
Your Home Is Used As Security
The bank is aware that you can’t flee with your home on the line. This means you are unlikely to default on your loan if you may end up being homeless.
This is why your home secures that meagre rate. However, the bank does have the right to foreclose if you don’t repay the loan.
Administrative Costs Are High
Even processing the legal fees for a cash-out refinance can be very expensive.
The cost may increase if you pay for additional expenses such as a home valuation. Consequently, even though the interest rate is low, you must still take these additional fees into consideration.
There Is Plenty Of Temptation
During cash-out refinancing in Singapore, it’s common for people to withdraw far more money than they need then splurge on luxury items.
The surplus frequently finds its way into opulent home renovations.
Make The Best Decision For Your Property
Note that even if you’re almost ready to choose the best course of action, the value of your property may still decrease over time.
Ultimately, there will be numerous factors influencing your decision. In addition, prevailing borrowing caps will determine your spending habits.
Always remember that you can choose unsecured personal loans if you want to steer clear of using your property as collateral.
BST Credit is your one-stop loan platform in Singapore if you’re looking for quick cash for your personal or business needs.
We also offer debt consolidation services and flexible terms for all our loans.
FAQs On Obtaining Home Equity Or Term Loans In Singapore
Is There A Distinction Between A Term Loan And A Home Equity Loan?
Yes, they do differ. A term loan is for property owners who want to loan on a property they haven’t fully paid off, whereas an equity home loan allows them to refinance on a fully paid property.
How Much Time Does It Take To Approve A Home Equity Loan?
The approval process should take about two months. However, if your current mortgage is with the same bank, it might take the institution up to four months to authorise a term loan.
Can I Pay Off My Home Equity Loan With My CPF Funds?
You cannot use your CPF savings to pay off an equity loan. Despite its low lending rates and lengthy term, this loan will still impact your monthly cashflow.
So make sure you have enough income before applying for a home equity loan.
Which Is Preferable, A Line Of Credit Or A Home Equity Loan?
Sometimes people consider a home equity loan to be a better option than unsecured loans such as personal lines of credit or credit cards. Both have their pros and cons.
Although a home equity loan has extremely low interest rates, failure to repay it could mean you lose your home.
On the other hand, while a personal line of credit is an unsecured loan, it will come with high double-digit interest rates.