What Is Equity In A Housing Loan And How Can You Make Use Of It?

Key Takeaways

Home equity refers to the difference between your property’s market value and your mortgage balance. A home equity loan, often used for large financial needs or debt consolidation, offers lower interest rates by using home equity as collateral. In Singapore, private property owners can borrow up to 80% of their equity, but strict criteria and costs apply.

You can take a home equity loan instead of a personal loan whenever you need larger sums of money or are looking for affordable debt consolidation options in Singapore. That’s a brilliant idea since using your home’s equity as collateral greatly reduces your credit’s overall cost.

At this point, you might ask, ‘what is equity in housing loan?’

Since your chances of securing an affordable, large sum of money to meet your needs depend 100% on your home equity, this article will answer this question in a manner anyone can understand.

You’ll also discover ways to use equity to acquire an affordable housing loan easily.

What Is Equity In Housing Loan?

Home equity is a useful financial tool that enables you to secure a loan to pay off your debt and make other valuable financial decisions.

It refers to the difference between the amount you owe on the mortgage and your property’s current market value. So, as you service your loan, you reduce the loan balance and build your home equity.

Let’s use a simple example below to illustrate this.

Assuming you buy a home worth $500,000 with a 10% downpayment of $50,000. You will have $50,000 of home equity as soon as you pay this amount.

With each repayment that you make, the equity increases. When you pay your mortgage 100%, your equity hits 100%, signifying that you have complete control of the property.

Remember that your home equity can change depending on the impact of the forces of supply and demand. In most cases, equity appreciates.

For example, if the home appreciates by $300,000, your equity after full mortgage repayment would be $500,000 + $300,000 = $800,000.

What Is A Home Equity Loan or Cashing Out Refinancing?

Home equity loans and cashing out refinancing are the same type of loans. Others use mortgage equity withdrawal loans, property refinancing, reverse mortgages, equity term loans, cash-out finance, and many other related terms, and all of them mean a loan you take after offering your home equity as collateral.

Since you offer your share of the value of your home as collateral, the interest rate is much lower than that of unsecured loans like personal loans. Most lenders charge around 1.6% per annum.

Note that personal loans typically cost more than 6% per annum.

So, from our answer to the query, ‘what is equity in housing loan?’ you can see that taking a home equity loan feels like refinancing your mortgage. That’s why many people think cashing out refinancing is one of its most suitable alternative names.

Before taking a Singapore home equity loan, remember that it’s designed with the needs of specific customers in mind. Below, let’s look at other features that make this credit facility unique.

Private Property Only

Singapore’s home equity or term loans are tailored only for private property owners. HDB flat owners can’t take advantage of them.

However, even private property owners must meet specific criteria to get these loans. Banks typically give priority to fully paid-up private properties. You have an added advantage if your home has appreciated over the years.

Loan Limits

Home equity loans in Singapore have limits that safeguard your interest. If you want to take the loan, subtract any unpaid home loan and CPF you used to service it, leaving you with equity.

The amount you can qualify for won’t be 100% of this remaining amount. Even if you meet all the requirements, you are more likely to get a maximum of 80% of your home equity.

Besides, your bank will consider general regulatory limits such as the Total Debt Servicing Ratio (TDSR) to determine the amount you legally qualify for. Note that the current TDSR in Singapore is 55%, meaning you can’t use more than 55% of your gross monthly income to service debts.

If you apply for a home equity loan, your bank will treat your outstanding home loan and the home equity loan as two separate credits.

Nevertheless, there’s an exception to the TDRS rule. If your housing loan is fully paid up and you want to borrow 50% or less of the property’s current value, your equity loan application will successfully go through whether you meet these requirements or not.

Loan Tenure

Your age impacts the amount of home equity loan you can secure. The law provides that the maximum tenure is 35 years or until the borrower reaches 75 years, whichever is shorter.

Restricted Usage Of Home Equity Loan

The Monetary Authority of Singapore bars borrowers of home equity loans from using it to finance the purchase of another home. If you have a paid-up house and don’t want to add another property to your portfolio, you can use it to pay off a second outstanding housing loan. Note that this option is often costly as it incurs several legal fees and other charges.

Ordinary Equity Loan Application Costs

As already said, adding another property to your portfolio is costly using a home equity loan. However, getting this secured cash-out financing in Singapore remains expensive, even if you aren’t doing that.

Before doing anything, you’ll spend much money on property valuation. Besides, you’ll have to wait about two or more months for the bank to complete the processing.

Should You Get A Home Equity Loan?

Many times, getting a home equity loan is an economically viable decision. Three factors can help you determine whether getting these loans is safe.

Purpose Of The Loan

Many wise homeowners often use home equity loans to fund projects that will positively influence their home’s equity. For example, you can do the same if you want to take a loan with lower fees and use it to settle an expensive mortgage.

Using the loan to consolidate other high-interest debts can also be a comparatively good idea. However, for this to work in your favor, you must be disciplined and pay off the loan on time.

Nevertheless, it might be better to opt for a renovation or a personal loan for house renovation or weddings.

Risk Level

Cash-out refinancing in Singapore is a great option for people looking for affordable sources of loans. So, you can consider it if you can afford it. However, since you are using your home as collateral, you risk losing the roof over your head if you default.

Note that no one can perfectly predict what the future of their financial ability will look like. So, the risk of losing the roof over your head makes equity loans the worst option, except when you use them to increase equity.

Property Value Appreciation

If your property’s value has increased, you can unlock some of the appreciation without disposing of your home. Banks consider this a wise decision because it doesn’t put you at great risk. However, you should use the money to fund the purchase of a capital asset.

Looking to make the most of your home equity? Apply for a loan today with Credit Thirty3 and unlock the financial potential of your property. Get started here.

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How To Apply For A Home Equity Loan

Applying for a home equity loan can be time-consuming and costly. Here, we’ve simplified the steps you should take to simplify the process.

Step 1: Decide How Much You Need

Since the amount you require directly impacts the total cost of your loan, determine how much money you need before applying upfront. This will help you avoid overpaying interest and other fees.

The value of your equity (80% of your home equity) and Total Debt Serving Ratio (55%) should guide you as you calculate how much you need.

Other costs like legal paperwork also matter. This type of work typically costs $2,500 to $3,000.

So, compare the amount you need and these costs and make a financially sound judgment. If the loan cost is too high, consider going for another option.

Step 2: Check Your Credit Score

Your credit score determines the interest rate your bank will charge you. A score of 620 can grant you a home equity loan, but a higher one is better. If your score is undesirable, improve it before applying.

Step 3: Compare Rates and Terms of Service

Once you’ve established that your credit score is good enough, shop for lenders and rates. Get quotes from at least three reputable lenders in Singapore. Consider banks, credit unions, online lenders, mortgage companies, and more before settling on the best three. Consider the closing costs, other fees, and terms and conditions other than interest rates.

Step 4: Complete Home Equity Loan Application

After selecting your preferred lender, you must apply formally. Depending on your lender’s preference, you can do this in person, over the phone, or online.

Provide the required financial documentation, including proof of home ownership, outstanding mortgage, current and relevant property valuation or payment for property valuation, bank statements, proof of income, and tax returns. While the application process varies from one lender to another, these are some documents you will likely be required to provide.

Step 5: Submit And Wait

Submit these documents and await. Your bank will send a letter informing you of the final decision. This typically takes about four weeks, but it can sometimes take a few months.

Use Equity In A Housing Loan To Get Affordable Loans

Taking a home equity loan can be the best idea if you want to use it to fund an economically viable project without putting your family or loved ones at risk. However, you can only take it on your private property.

Besides, you qualify for no more than 80% of your equity. If you have an Executive Condominium (EC), the five-year Minimum Occupancy Period will have to elapse before you consider applying.

When answering this critical quiz, ‘What is equity in a housing loan?’ We said it could change depending on the market condition. So, your lender will need your equity’s current market value and base its decision on it.

If you are looking for a competent and trustworthy lender who can help you determine the accurate value of your home equity and give you an affordable equity home loan, consider Credit Thirty3.

You can contact us right away and get professional guidance for free. Alternatively, you can apply for a loan, and we’ll contact you shortly after receiving your details.