An equity term loan, otherwise known as cash-out refinancing, allows one to borrow a sum of money at a favourable rate in exchange for using one’s property as collateral. Since this option is not without its risks, here is what you will need to know and the considerations to make before deciding whether or not to take out the loan.
How does an equity loan work?
With an equity loan, the borrowed amount can only go up to 75% of one’s property value at the time of application. How much one’s property is worth is usually determined by an appraiser from the bank or financial institution you’re taking the loan from.
However, in the case where you have yet to fully pay up for your home, you’ll only be able to borrow an amount equivalent to your property’s market value minus your outstanding loan amount and CPF used in servicing your home loan. As for the loan tenure, the maximum is usually either 35 years or 75 years minus one’s current age as well as the number of years spent in servicing the loan.
Does any property work?
Sadly enough, no. In Singapore, equity term loan borrowers are required to own private property in order to be eligible. This includes anything from an executive condominium* or private condominium to private landed property or commercial property. However, HDB flats don’t count, so HDB flat owners aren’t eligible to take out equity term loans.
One additional thing to note is that homeowners who still have an outstanding home loan to pay back have to get their equity term loan from the same bank.
One reason why equity loans are popular is due to the low-interest rate. Averaging at slightly over 1%, it’s far lower than what the other types of loans charge. Moreover, unlike the other types of loans that only let one borrow up to a few times of their current salary—equity term loans can give out a far higher amount of money in the form of cold hard cash.
When it comes in handy
The most common uses of an equity term loan in Singapore include consolidating multiple higher interest debts, starting a business, unlocking some capital to invest elsewhere or getting cash urgently out of one’s house without having to sell it. The latter reason is most often the case when one has to pay off their children’s education fees or as an alternative to financing a car or renovation expenses.
Additional things to know
- Additional costs to factor in include administrative and legal ones in the property valuation process, which can range from $2000 to $3000 depending on the property type.
- Don’t underestimate the amount of time it takes to get an equity term loan approved. Expect it to take around 2 months; 4 if you have an existing home loan to pay back. It may not be an ideal choice in the case of an emergency.
- Unlike home loans, one won’t be able to use one’s CPF to pay back an equity term loan. Make sure cash flow is sufficient for repayment each month.
Never forget that interest rates are so low for this type of loan only because you’re risking the roof over your head. Missing payments can have disastrous consequences. If you don’t want to have your home repossessed by the bank or be forced to declare bankruptcy, it’s crucial to take an equity term loan seriously and do your utmost to make payments on time.
*If you own an executive condominium, a minimum occupation period of 5 years is necessary before an equity loan becomes an option available to you.