What Is Equity In A Housing Loan And How Can You Make Use Of It?
March 1, 2023
You can take a home equity loan instead of a personal loan whenever you need larger sums of money or looking for affordable debt consolidation options in Singapore. That’s a brilliant idea since you use your home’s equity as collateral, which is a great way to reduce your credit’s overall cost.
At this point, you might be asking this, ‘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 that anyone can understand.
You’ll also discover ways you can 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, using the above example, if the home appreciates by $300,000, your equity after full mortgage repayment would be $500,000 + $300,000 = $800,000.
What Is An Home Equity Loan or Cashing Out Refinancing?
Home equity loans and cashing out refinancing refer to the same type of loan. Others use mortgage equity withdrawal loans, property refinancing, reverse mortgage, equity term loan, 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 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, you should remember that it’s designed with the needs of specific customers in mind. Let’s look at other features that make this credit facility unique below.
Private Property Only
Home equity loans or term loans in Singapore are tailor-made only for private property owners. So, HDB flat owners can’t take advantage of it.
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.
Home equity loan Singapore has limits that safeguard your interest. If you want to take the loan, subtract any unpaid home loan and CPF that you used to service it, which leaves 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 Total Debt Servicing Ratio (TDSR) to determine the exact 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.
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, it’s costly to add another property to your portfolio using a home equity loan. However, getting this secured cash-out financing in Singapore remains an expensive affair, even if you aren’t doing that.
Before doing anything, you’ll spend a lot of 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. Here are three factors that can help you determine whether getting these loans is safe.
Purpose Of The Loan
Many wise homeowners often take home equity loans and use them 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 purposes such as house renovation or weddings.
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.
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 to avoid overpaying on 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, start shopping 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. Other than interest rates, consider the closing costs, other fees, and terms and conditions.
Step 4: Complete Home Equity Loan Application
Apply formally after selecting your preferred lender. 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 with send a letter informing you of the final decision. It typically takes about four weeks. However, in some cases, it can 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 housing loan?’ we said it could change depending on the condition of the market. 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.