In the earlier article, “Executive Condo (EC) or Private Condominium”, we raised a point that the owner of the EC, like the owner of a private condominium, can cash out from their EC without selling their home using a home equity loan. Since then, we have received several enquiries regarding home loan equity and decided to put up this article to share with you.
What is a home equity loan?
A home equity loan, or in broader terms, property equity financing, is a lump sum loan you can secure from the banks or financial institutes by using your equity in your property as collateral. The property can be an executive condo, private condo, private landed property or commercial property, but not HDB.
The amount of loan you can get from the bank depends on the value of your property at the point of time of application. And the value of your property is determined by an appraiser from the banks or financial institutes.
Very often, people used home equity loans to finance major expenses such as home renovation, kid’s education, business venture or other investments.
In Singapore, people usually cash out their existing property to buy their second property. And cashing-out your existing property to buy a second property is also the “secret” touted by several advertisers boasting how they can help someone with little or no cash to buy their second property.
Why cash out using a home equity loan?
There are several ways to get cash out from your property, to sell your property or collect rent from your property. However, if both are not an ideal solution for you, a home equity loan may be your best option.
While you may be considering renovation loans, personal loans, business loans, etc., a home equity loan trumps the rest of the loan with its lowest interest rate. The effective interest rate for a home equity loan is approximately 1.5 to 2%, while renovation loan is 4 to 10%, personal loan & business loan range between 10 to 25%.
With its low-interest rate, home equity loans can also be used to reduce other debts.
For example, you have a personal loan of $100,000 to be paid over 36 months with an interest rate of 10%; you will have a monthly payment of $3,227 and a total interest of $16,162 for the 36-months loan.
However, by using a home equity loan to pay off the personal loan, you will be enjoying the low interest of 2% with a monthly repayment of $2,864 and a total interest payment of $3,113. Using a home equity loan, you would have saved up to $13,049 of interest payable.
The tool used in the calculation: Loan Repayment Calculator
When can you start to cash out your property?
For private residential and commercial property, you can start to cash out at any time. However, if you have just started to finance or refinance the property, you may incur a penalty for the existing mortgage loan.
For an executive condominium, you can only cash out your property after fulfilling the 5-year minimum occupation period (MOP).
How much you cash you can get from home equity loan?
In general, the bank or financial institutes will lend you up to 80% of your property valuation if you do not have any outstanding loan, subjected to TDSR if you are borrowing over 50% of the property value. If you have an existing housing loan, you will only be able to borrow up to 50% of the property value, and subsequent (i.e. 3rd, 4th, etc.) will be 20% of the property value.
So, let’s say you can borrow up to 80% of your property which is valued at $1,000,000, and you have used $200,000 in CPF with an outstanding loan of $250,000. The amount of cash-out funds available to you will be $350,000.
Cashout Fund = 80% of Property Value – CPF Used – Outstanding Loan
Putting in the number, you will get:
Cashout Fund = $800,000 – $200,000 – $250,000 = $350,000
If you have noticed, CPF monies will not be taken out from the property, to prevent you from drawing out your CPF monies earlier using a home equity loan.
Recommended Reading: What is TDSR & LTV?
What is the loan tenure for a home equity loan?
Your maximum loan tenure is 75 years minus your current age, minus the number of years you’ve spent servicing the loan. For example, you are 35 years old and have serviced your existing loan for ten years; your loan tenure can be up to 30 years.
Maximum Loan Tenure = 75 years – Current Age – No.of Years Servicing Existing Loans
Putting in the numbers, you will get:
Maximum Loan Tenure = 75 – 35 – 10 = 30 years.
Do also note that your maximum loan tenure for a home equity loan is 30 years and not exceeding 65 years old. To illustrate, let say you are 30 years old and have serviced your current loan for ten years, your maximum loan is capped at 30 years.
Maximum Loan Tenure = 75 – 30 – 10 = 35 years (But capped at 30 years)
What are the costs involved in applying for a home equity loan and how long does it take for a loan to be approved?
The cost will be on the legal fees for paperwork and valuation fees. They would amount to around $3,000. And the loan will take about 2 weeks to 4.5 months to approve:
- Existing Mortgage – approximately 2 weeks (take note of penalty if within lock-in period)
- Full Paid Property – approximately 1.5 months
- Refinancing + Equity Home Loan combo – approximately 4.5 months
However, if you are using your commercial property as collateral, you can go for property equity overdrafts. Property equity overdrafts allow you to have the cash on standby. When you need the money, you can draw down the standby cash up to the maximum facility limit. Apart from time flexibility, you also pay interest on the amount of money you have drawn, and have the flexibility to decide how much loan principal you like to repay at any time without penalty fees.
What’s the catch and potential risks of using a home equity loan?
It cannot be Sunday every day. The biggest catch is that you cannot use CPF to pay off the loan. In other words, you have to finance the loan using cash. And let’s face it, taking up a home equity loan, or property equity loan is taking up debt. The potential risks are:
- Risk of default: When taking up a home equity loan, you are using your property as collateral. So, if you default, your property will technically be at risk to be repossessed by the bank to cover the balance loan amount.
- Margin Call: During good times, the value of property keeps going up, and everyone is happy. But if things took a turn and the value of a property starts to tumble, banks will come knocking on your door to ask you to top up your home loan. For example, if you owe $800,000 on a $1,000,000 property and the value of the property drops to $700,000, there will be a difference of $100,000. The bank may issue a margin call for the difference of $100,000 which you have to pay on short notice.
Tips to note when cashing out property using a home equity loan.
Cashing out involves legal, valuation cost and time. Henceforth, do consider the amount you would like to cash out. You do not want to end up needing to cash out again because you will need to pay the legal and valuation fees again and have to wait for another 2 to 3 months. After cashing out, do make sure you have an emergency funds prepared for the unexpected. You could also take up insurance to protect yourself. And instead of walking into a bank branch and hoping to get a good banker to assist you with your home equity loan, you have the option to drop us a note to get our experienced staff to guide you through the process for free. Like other mortgage brokers, we can help you in getting the lowest rate, or the best valuation on your property. And, at times, reduce the administrative costs of getting your loan.
With his love for numbers and data, Edwin has provided valuable insights to his clients and readers to empower them to make better-informed real estate decisions.
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