Home Equity Loan in Singapore: 5 Things to Consider Before Using Your Property To Loan More Funds
Taking a home equity loan can become an attractive option for many homeowners in Singapore. Many have the bulk of their net worth tied up in their property. Depending on your home, you are essentially sitting on anything from a few hundred grand to over a million dollars.
Home equity financing allows homeowners to ‘unlock’ the monetary value of their properties, giving them access to a larger loan amount. Since you’re using your property as collateral to secure a loan, the interest rates are typically much more attractive than other kinds of unsecured loans (e.g. personal loans).
Also, the amount you can cash out can be significant. Have more questions on home equity financing? Speak to our Mortgage Experts.
What to Consider Before Taking out a Home Equity Loan in Singapore
Can I take out a home equity loan? | Yes, if you own a private property. If you own an EC, you have to fulfil your MOP first. |
How much can I cash out? | Up to 75% of your property’s value (assuming your property is fully paid). |
What are the costs involved? | Upfront, you’ll pay $3,000 to $4,000 in legal and valuation fees. Then, you’ll have to keep up with your monthly repayments. |
What should I use the extra cash for? | Investing and paying off high-interest, unsecured personal loans or credit card debt might be a good choice. |
Can I afford to service the home equity loan? | Calculate your finances wisely first, and ask one of our home loan advisors if you need help. |
When used correctly, home equity financing can be a helpful tool and can also help you grow your wealth. However, you may risk the roof over your family’s head if used unwisely.
Taking on such a loan differs from having a home equity LOC (line of credit). With a home equity LOC, you have a revolving credit line you can use for large expenses or to consolidate debt. As you repay your balance, the available credit amount on your home equity LOC is replenished.
Having a home equity LOC is more common in countries like the US. However, for the purpose of this article, we’ll only talk about loans for home equity financing. Here are five questions you need to ask yourself.
1. Can I Take out a Home Equity Loan in Singapore?
You can only take out home equity loans on private properties in Singapore. This means HDB flats are not applicable for home equity financing. The HDB website explicitly states that “you are not allowed to use your HDB flat, which has been fully paid for, as collateral to banks to raise credit facilities for private reasons.”
If you own an Executive Condominium (EC), you will have to wait until after you complete your 5-year Minimum Occupation Period (MOP) before being eligible.
You can take out a home equity loan on a property with an existing mortgage, provided you do so with the same bank. If you are looking to save on your home loan and have yet to try refinancing, consider looking at the mortgage packages on the market first.
2. How Much Can I Cash out from My Home Equity Loan in Singapore?
The usual mortgage rules apply: When taking a home equity loan, you must maintain the minimum Loan-to-Value (LTV) ratio of 25%. This means you can only cash out up to 75% of your property value (assuming it is fully paid).
You are not allowed to cash out the CPF portion of your home equity, which means any CPF savings used to pay for your home down payment and monthly mortgage in the past cannot be cashed out.
You must also adhere to the Total Debt Servicing Ratio (TDSR), which stipulates that your total monthly loan repayments cannot exceed 55% of your monthly income. However, the TDSR does not apply if you borrow up to 50% of your property value.
Finally, your credit history may also affect how much the bank is willing to loan you.
3. What Are the Costs Involved in Getting a Home Equity Loan in Singapore?
You can expect administrative fees such as legal and valuation costs that will likely amount to between $3,000 and $4,000. Depending on the amount you intend to cash out, it may or may not be worth it. For instance, if you are only cashing out $100,000, this will immediately bite off 4% of your cash in hand.
Besides this, you’ll need to be able to keep up with your monthly repayments, or you risk having your home repossessed by the bank. Also, you cannot use your CPF funds to finance home equity.
One potential positive is that if you are taking a home equity loan on an investment property, you may be able to get tax deductions on your interest.
4. What Should I Use the Extra Cash For?
Home equity loans do not dictate what you use the money for, but being able to cash out such a large sum of money can be a boon or a bane. Ultimately, how you use the funds will determine whether this is a good or bad financial decision.
If you are considering buying a new car, booking an expensive world tour, or renovating your home, you may be spending your money on things you cannot afford. These are not must-haves in your life; you need to question whether you want to spend a large chunk of your net worth on it while having to shoulder another long-term financial obligation.
On the other hand, if you require the money to pay off high-interest, unsecured personal loans or heavy credit card debts, you may be saving a lot of money in the long run.
If you want to use the money to invest in the stock market or start a business, you may also be able to work your money harder and earn superior returns as compared to the interest you have to pay. Of course, that also means an additional investment risk that you are taking on.
If you have fallen on hard times, especially if you have been retrenched and need the cash to maintain your and your family’s daily living expenses, a home equity loan may be one of the lowest-cost options available. However, you’ll need to ensure that you can set aside sufficient funds to meet the monthly repayments required.
5. Can I Afford to Service the Home Equity Loan in Singapore?
Just because a home equity loan is one of the cheapest loans you can get doesn’t mean you should use it. You have to determine your ability to service the recurring monthly loan subsequently.
If you are nearing retirement and prefer winding down in life, shouldering a monthly debt repayment can be stressful when your income dries up. On the other hand, if you have sufficient cash flow monthly and can make better use of a lump sum of money to invest, home equity financing can potentially build your net worth significantly.
Home Equity Financing Can Be Useful, If Used Correctly
‘Unlocking’ the value of your home sounds great, but at the end of the day, a loan is a loan, and it is unwise to take on extra debt frivolously. Always ensure that you will put the money towards prudent use, as administrative expenses can be steep. If you aren’t able to keep up with your repayments, it may be the roof over your head that is at stake.
Speak to one of our PropertyGuru Finance Mortgage Experts if you have any questions on home equity financing or home equity LOC. They can provide tailored home financing advice and handle all the tedious home loan application processes. Best of all? It’s free!
