How Do You Get An Equity Term Loan?
December 15, 2022
Due to the rising interest rate environment, you may have heard of other types of loans such as the equity term loan, often known as the home equity loan or a term loan.
So what do these terms mean? How do you apply for an equity term loan, and more importantly, how can you use it to your benefit?
In Singapore, most people’s net worth is linked to their properties. Depending on the value of your home, you could be sitting on several hundred thousand to over a million dollars.
In such an instance, an equity term loan or home equity loan in Singapore may be an appealing option.
Those familiar with equity term loans frequently view it as the key to “unlocking” your property’s value.
For many Singaporeans, one of the primary disadvantages of real estate is that it ties up your cash. If you have to sell your home to establish a business or send your children abroad to study, taking out an equity term loan can fulfil your responsibilities without selling your home.
What Is An Equity Term Loan?
Before delving into the specifics of an equity term loan, let’s define what it is. Equity term loans are a type of home mortgage loan in which you use the equity of your home as security after purchasing it and collecting equity.
An equity term loan allows you to borrow against a property that has not been fully paid for. An equity loan or home equity loan allows you to borrow against a property that has been fully paid for.
Accumulating equity in a property refers to a property’s price appreciation over time. So with an equity term loan, you’re actually borrowing against the equity that has accumulated over time.
To know the current value of your property, you have to employ the services of property valuators, who are professionals in determining the current value of a property.
Often, the lender you’re borrowing from will provide you with a property valuation before you are granted the term loan or equity home loan.
Term loans secured by real estate equity can provide you with funds in a single upfront payment. You can better manage your money because you can return the term loan every month, which includes principal and interest.
Hence, a property equity term loan may be the ideal option if you know the exact amount you need to borrow.
Since your home serves as collateral or security for the loan, the interest rates are significantly lower than for unsecured loans such as personal loans. Also, the sum that you can cash out can be substantial.
When used appropriately, a home equity loan in Singapore may be a highly beneficial tool and a good way to grow your wealth. Similarly, if used irresponsibly, you can put the roof over your head in jeopardy.
Now, you may realise this is similar to obtaining a second mortgage. For this reason, a home equity loan or equity term loan is often known as a reverse or second mortgage.
Note also that the interest rate – approximately 2% per year – is still lower than the average interest rate for a home loan.
How To Check Your Eligibility
Only private property owners are eligible for home equity loans in Singapore. Therefore, if you only own a HDB unit, you will not be eligible for cash-out refinancing. The only way to qualify for this loan is to acquire a private residence.
In addition, if you own an executive condominium (EC), you must wait until the five-year Minimum Occupation Period (MOP) expires before considering a cash-out refinance.
If you have an outstanding housing loan, you can only obtain a home equity loan from the same bank that issued your original mortgage.
For instance, if your present mortgage is with Standard Chartered Bank, you would be obliged to obtain your new loan from the same institution.
However, you can investigate the possibility of refinancing your loan with another bank.
Interest Rates Of Equity Term Loans
The average interest rate of a home equity loan is above 1%. In contrast, the interest rates for renovation loans, business term loans, debt consolidation loans, and education loans are all much higher.
With ever-rising interest rates and headlines such as Singapore house loan rates reaching a new high of 3.08%, you may be wondering how the interest rate on an equity term loan would differ. Banks regard home equity loans as mortgages. Consequently, the interest rate is set or variable, similar to home loans.
While it may not be the best time to take out an equity term loan with interest rates rising across the board, it could help your overall investment strategy by increasing the amount of capital available for deployment.
Factors To Consider
Similar to any other loan in Singapore, there are considerations you should keep in mind before obtaining an equity term loan.
But before we get to that, ask yourself, “Should I obtain a home equity loan?” If your answer is yes, consider the following:
1. Your Eligibility
As mentioned, only private residences are eligible for home equity loans in Singapore. HDB flats cannot be used for home equity loans.
The HDB website states that you cannot use your fully paid HDB flat as collateral to get credit facilities from banks for personal reasons.
Even if you own an EC, you will not be eligible for a home equity loan until you have completed your MOP. If you do so with the same bank, you can obtain a home equity loan on the property with a mortgage.
2. How Much You Can Cash Out
Standard mortgage regulations apply. When taking out a home equity loan, you must maintain a loan-to-value (LTV) ratio of at least 25%. This means you can withdraw no more than 75% of your home’s value, assuming it has been fully paid for.
You are not permitted to cash out the CPF share of your home equity. Therefore, you cannot cash out any CPF savings you used in the past to pay for your home’s downpayment and monthly mortgage.
In addition, you must comply with the Total Debt Servicing Ratio (TDSR), which states that your total monthly loan repayments cannot exceed 55% of your monthly income.
However, the TDSR is not applicable if you borrow up to 50% of your home’s worth.
3. Costs Involved
You can expect administrative fees such as legal and valuation fees to be between $3,000 and $4,000. Depending on how much you plan to withdraw, it may or may not be worthwhile.
In addition, you must be capable of making the monthly payments on the home equity loan. Otherwise, you risk having the bank repossess your home. Also, you cannot use CPF money to repay a home equity debt.
4. Your Repayment Ability
A home equity loan is one of the cheapest loans, but it does not imply you should obtain one. You must evaluate your ability to repay the monthly recurring debt in the future.
Making a monthly loan payment can be difficult when your income dries up, and you are nearing retirement and want to slow down.
On the other hand, if you have adequate cashflow every month and could do with a lump sum payment to invest better, a home equity loan or equity term loan might significantly increase your net worth.
Pros And Cons
Benefits Of A Home Equity Loan Or Equity Term Loan
- The loan has a fixed interest rate and fixed monthly payments for a fixed time
- Lower interest rates than other loans
- Relatively easy to obtain large sums of money you may not be eligible for through other means
Disadvantages Of A Home Equity Loan Or Equity Term Loan
- There are various risks, including foreclosure and falling behind on your repayments, which prevents you from moving or selling your property if its value declines
- A lump sum payment means that you may take out more than you need. Hence, you may squander the additional funds and undermine the value of your home in the process
- You may incur more debt payments than you can manage in the future
How Much Can You Cash Out?
The amount of money that can be cashed out frequently depends on the following three variables:
- Up to 80% of your home’s current market value
- How much (if any) do you owe on your current mortgage?
- The total amount is withdrawn from CPF to purchase a home
Typically, banks permit consumers to borrow up to 80% of the property’s worth. Before determining this, they will deduct any outstanding loan balances and CPF funds used to purchase the property.
The 55% TDSR limit will also determine the amount you can borrow.
The tenure for a term loan or home equity loan is 75 years minus your age and the number of years you have spent paying your home loan.
So if you are 45 years old and have already spent 15 years paying off your existing home loan, and want to borrow an equity term loan, your loan tenure will be 75 – 45 – 15 = 15.
However, some banks may calculate their tenures differently.
How Should You Use The Extra Cash?
The ability to withdraw such a large quantity of money can be a blessing or a curse. So it is crucial to use the funds wisely. You can spend the additional funds for:
- Expenses for education, a wedding, and your business
- To consolidate debts with higher interest rates at a lower rate
- To support your family’s daily living costs if you were laid off during the pandemic
For the best equity term loan, visit Credit Thirty3.
With years of serving Singaporeans with some of the best loan terms, we pride ourselves as one of the best licensed money lenders in Singapore.