Need to borrow a large sum of money but don’t want to resort to a personal loan? You might consider a Home Equity Loan, which allows you to borrow against your private property, even while you are still repaying your mortgage. But is it worth “cashing out” your home this way? Today, I’ll share a guide to home equity loans in Singapore.
Table of Contents
What is a Home Equity Loan?
Home equity loans go by many names: “home mortgage loan,” “cash-out refinancing,” “property equity financing,” “asset appreciation mortgage,” and more. Regardless of the name, they are all home equity loans. A common feature of all home equity loans is that your home is used as collateral. As you pay down your mortgage, the equity in your home (your ownership stake) increases. So, simply put, a home equity loan is a loan taken out against the equity in your property. If this is hard to understand, just remember that the following conditions apply to home equity loans:
Only for Private Properties
If you are an HDB flat owner, unfortunately, you cannot mortgage your HDB flat to get a sum of cash. Home equity loans are only available for private properties, and even then, they are subject to careful scrutiny by the banks. Therefore, it’s best if the property has appreciated in value over many years.
Home Equity Loan Limit
Unfortunately, even if you have a condominium worth $2 million, you cannot borrow its full value. First, the loan amount must be reduced by the outstanding home loan and any CPF payments made. Then, the amount you can borrow is subject to the bank’s approval and will not be 100%; it will typically be around 75% of the remainder. Finally, you will also be limited by the Total Debt Servicing Ratio (TDSR) regulation, which means your loan repayments cannot exceed 55% of your monthly income.
Loan Application Fees
It’s important to note that applying for a home equity loan can be a rather tedious and costly process. You will need to pay a (mandatory) property valuation fee of between $2,000 to $3,000 upfront. Additionally, it takes at least 2 months to secure a home equity loan, so it is not a solution for emergency funds.
Should You Apply for a Home Equity Loan? Consider These 3 Aspects
Loan Risk Level
Home equity loan interest rates are very low because the bank holds your property as collateral—with their home in the bank’s hands, most people are unwilling to default on their loans and risk losing their house! However, mortgaging a house is not suitable for everyone. If you are unable to repay the loan, you could genuinely lose the roof over your head.
Purpose of the Loan
Whether it makes sense to apply for a home equity loan depends on why you need the money. Many borrowers use the funds to start a new business or for investments, while others use it to pay off existing debts. For other purposes, such as renovations or a wedding, you might want to consider a personal loan or a renovation loan instead.
Property Value
Applying for a home equity loan is particularly suitable if your property has appreciated in value. For instance, if you bought a condominium unit for $1 million and it has now appreciated to $2 million, you can access a portion of that capital gain without having to sell the condo—it’s the best of both worlds.
How to Apply for a Home Equity Loan
Applying for a home equity loan is a complex process. Because various interest rates and packages are usually not published online, you need to consult with different banks (either by phone or in person). At Anjia SG, we help simplify the entire loan application process. We will recommend the best banks to contact based on your situation and loan requirements. This means we will act as a bridge between you and the banks, screening all the home equity loan options on the market and providing professional advice tailored to your needs.
Frequently Asked Questions
How does a home equity loan work?
A home equity loan, or cash-out refinancing, is when a bank lends you a sum of money using your home’s equity as collateral. When the loan is active, the bank theoretically owns a portion of your home.
How much can you borrow with a home equity loan?
The amount of a home equity loan is determined by the property’s value (which is why a property valuation is mandatory), minus any CPF used and the outstanding home loan amount. You may not be able to borrow the full remaining amount.
Which is better: a home equity loan or a personal loan?
A home equity loan is considered an alternative to unsecured loans, such as credit cards or personal loans. Each type of loan has its pros and cons. Home equity loans have very low interest rates, but you risk losing your home if you can’t repay it. Meanwhile, a personal loan is an unsecured loan, but you will have to pay double-digit interest rates.
What are the disadvantages of a home equity loan?
The main drawback of a home equity loan is that your property ownership is now held as collateral. This might be acceptable if you own multiple properties. However, if the property is your only home, it can be a bit risky.
If you are unsure whether you qualify for a home equity loan, please contact us, and we will provide you with a professional consultation.
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