Best Guide to Home Equity Loan

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If you need to borrow a large sum of money but don't want to resort to a personal loan, you may want to consider a home equity loan. This type of loan allows you to borrow money against the value of your property, even while you're still paying your mortgage. However, before you decide to "cash out" your home, it's important to consider whether it's worth it. Here's a guide to understanding home equity loans in Singapore.

A home equity loan, also known as a second mortgage, can take various forms such as cash out refinancing, property equity financing, or mortgage equity withdrawal loan. Regardless of the name, the common feature is that you offer your home as collateral. As you pay off your mortgage, you build equity or ownership of your home, and a home equity loan means borrowing against that equity in your property.

Do I qualify for a home equity loan?

In Singapore, home equity loans can only be obtained for private properties, which means that HDB flats are not eligible. The HDB website explicitly states that it is not permissible to use a fully paid HDB flat as collateral to obtain credit facilities for personal reasons. For Executive Condominiums (EC), you must wait until after completing the 5-year Minimum Occupation Period (MOP) to be eligible for a home equity loan.

What is the maximum loan amount I can take on a home equity loan?

The standard mortgage rules still apply to home equity loans. This means you must maintain a minimum Loan-to-Value (LTV) ratio of 25%, which implies that you can only cash out up to 75% of your property value (assuming it is fully paid). You cannot cash out the CPF portion of your home equity, which refers to any CPF savings used to pay for your home down payment and monthly mortgage in the past. You must also adhere to the total debt servicing ratio (TDSR), which mandates that your total monthly loan repayments cannot exceed 55% of your monthly income. However, if you are borrowing up to 50% of your property value, the TDSR does not apply. Additionally, the amount the bank is willing to lend may be influenced by your credit history.

To determine how much you can borrow against your property, you may use the affordability calculator provided.

What if I am not able to pass my TDSR requirement?

Alternative lenders also exist to help borrowers that have may need funds but face TDSR issues. These are licensed lenders under Ministry of Law and can provide bridging loans for up to 3 years and can even be on interest servicing only. The catch is that the interest rates on these loans are priced slightly higher at 7-8% p.a. This is still cheaper than most personal loan rates offered by banks which are at 9-10% p.a.

Are there non-interest cost I should expect for my home equity loan?

You should expect to incur administrative fees such as legal and valuation costs when obtaining a home equity loan. These fees usually amount to around $3,000 to $4,000. Whether or not it's worth it to obtain a home equity loan depends on the amount you plan to cash out. For example, if you only want to cash out $100,000, the administrative fees would immediately consume 4% of your cash.

In addition to these fees, you must be able to keep up with the monthly repayments on the home equity loan. If you are unable to do so, the bank may repossess your home. Furthermore, you cannot use your CPF funds to pay for the home equity loan.

One potential benefit is that if you obtain a home equity loan on an investment property, you may be eligible for tax deductions on the interest paid.

Are there any restrictions to the use of my funds from a home equity loan?

Home equity loans do not come with restrictions on how you use the borrowed money. However, the decision to obtain a large sum of money through a home equity loan can be either beneficial or detrimental. The ultimate outcome depends on how you use the funds. If you're considering using the money to purchase items like a new car, expensive world tour, or home renovation, it's important to note that these may not be necessary and could lead to financial strain. You must assess whether it's worth spending a large portion of your net worth on non-essential items while taking on a long-term financial obligation.

Conversely, if you need the money to pay off high-interest unsecured personal loans or significant credit card debts, a home equity loan may save you money in the long run. Additionally, if you plan to use the funds to invest in the stock market or start a business, you may potentially earn higher returns than the interest you'll be paying. However, this entails additional investment risks. If you've experienced financial hardship, such as losing your job during the COVID-19 crisis, a home equity loan could be a lower-cost option to cover daily living expenses. However, it's essential to ensure you can afford to make the required monthly payments otherwise, you might lose your home. Here are the pros and cons of taking a home equity loan:

How do I apply for a home equity loan?

Getting a home equity loan can be a hassle because you usually won't find all the information you need online. This means you'll have to reach out to different banks yourself, which can take a lot of time and effort. However, at Lendingpot, we aim to simplify the loan application process for you. All you have to do is provide us with your details, and we'll take care of the rest. This includes checking all the home equity loan packages available in the market and recommending the one that suits you best. If you decide to go ahead with the loan, you'll have to pay for a property valuation before receiving an approved loan amount.

Applying for a home loan:

1

Compare the best home loans

First, compare the latest home loan interest rates and packages on the market. Our fully automated assistant via WhatsApp, guides you through a series of questions tailored to your mortgage requirements and gives you a list of the best home loans tailored for you.

2

Consult with a mortgage specialist if you need extra support

While, our user-friendly online application makes the process hassle-free, our dedicated Mortgage Loan Officers are ready to assist you every step of the way. They're ready to help with any questions you may have and provide unbiased advice on your application. If you're uncertain about terms or new to the home loan process, don't hesitate to set up a one-on-one session for additional support.

3

Apply for your home loan

After you've consulted with a mortgage specialist and found a home loan that meets your needs, it's time to apply for the loan. With the support of the mortgage specialists, you can complete the application process within a few working days. It's worth noting that some foreign banks may take up to a week for approval, so you may need to be patient during this stage.

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After you have understood the three concepts, it is time for you to put your affordability to the test. Simply key in the few details and it will let you know the maximum value of the property you can afford.

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*Loans are typically subject to an administrative fee of 3-5% deducted upfront from the loan disbursement

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Rates and fees as of 19 Feb 2024
The home loan recommendations is an estimate. The results do not include other factors such as lock-in period. To obtain a more comprehensive understanding of your potential savings, we recommend reaching out to one of our mortgage specialists.

Frequently Asked Questions

Why should I talk to a mortgage broker when I can go directly to the bank?

Mortgage brokers assist you in comparing home loan offers from all Singaporean banks and financial institutions. We are aware of the most affordable fixed and SORA home loan rates. The best housing loan rates in Singapore may be found right here if you're seeking for them. Lendingpot also has access to exclusive rates and packages that are not accessible to the general public as a result of our long-standing connections with our partners. We also collaborate with trustworthy banks and legal companies, to whom we entrust our clients with. They make sure the procedure for applying for a house loan is quick and easy. The best part is that our service is always free and we share rebates with our clients.

Should I get fixed or floating rates for my mortgage? 

The fixed rate is safer and more reliable since it won't move in response to market changes. It is often higher than the floating rate, though, and if the market is down, you run the danger of getting locked in at a high rate. The SORA variable or floating rate is more unstable and subject to fluctuation. Recent COVID-19 epidemic has caused floating rates to reach a new low. They have however recovered above pre-covid levels. Therefore there is a risk to either rate choice. Simply said, there is no absolute better option. Your future expectations, risk tolerance, and anticipated market swings will all play a role in determining whether a fixed rate or variable rate is better for you.

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