Ravi Chandran
Home equity loan is the loan available against equity in a property, which is calculated on the basis of its current market value
- Home equity loan is the loan available against equity in a property, which is calculated on the basis of its current market value.
- An increase in the market value of the home or a decrease in the outstanding home loan results in a rise in the home equity against which a loan can be taken.
- The loan is available against residential and non-residential property. It should be fully constructed and should be a freehold or leasehold property, having a clear and marketable title.
- A home equity loan can be taken for any purpose, including education of children, marriage expenses, medical expenses, even for refinancing a home loan.
- The documents establishing the financial and repayment capacity of the borrower have to be provided, along with a photocopy of the documents of the property and a valuation report.
- A home equity loan may not offer any tax benefits on repayment as is available to the borrower in the case of a home loan.
A home equity loan lets you borrow money, while using your house as collateral. Home equity loan is another option available to homeowners who may have a tight cash situation but have have a valuable house at their disposal, which they may sell and downgrade.
But a home equity loan lets you get money out of your house, without having to lose it.
There are plenty of advantages: when your house is the collateral, the bank feels a lot more secure; they know you can’t exactly pack up your house and run away with it. Because there’s something they can foreclose on, banks consider home equity loans to be low-risk, secured loans. That means they charge a super-low interest rate, seldom above 1.3 per cent per annum. For reference, that’s less than a third of your CPF Ordinary Account rate (up to 3.5 per cent per annum), and about 1/6th of a personal loan rate (about six per cent per annum).
That super-low interest rate means home equity loans are quite cheap, and can provide a much bigger loan than you’d get through, say, a personal installment loan. Most other, unsecured loans can only lend you up to four times your monthly salary.
On top of this, the government in 2017, made regulatory changes to home equity loan restrictions. If your house is already paid up, you can borrow up to half its value, without having to meet Total Debt Servicing Ratio (TDSR) restrictions.
Sadly though, home equity loans can only be gotten for private a private property. HDB rules say, “HDB flats can only be mortgaged to banks or financial institutions to finance the purchase of the flat itself. You are not allowed to use your HDB flat, which has been fully paid for, as collateral to banks to raise credit facilities for private reasons.“
If you are looking for a home equity loan, or are you trying to borrow money to buy a home, there are good deals and bad deals. If you don’t want to get stuck with a bad one, be careful:
- Beware of great deals that come to you by way of the phone, mail, WhatsApp or internet. More often than not, these too-good-to-be-true offers are scams.
- Beware of renovation contractors who offer to finance work on your home.
- If you need a home equity loan, check with a mortgage broker.
- Read all paperwork carefully before you sign anything! A sales person may try to rush you into signing. Don’t fall for this.
- Take your time and get help. Insist on getting copies of all of the papers ahead of time. Take plenty of time to review them. Show them to a lawyer if you can.
This is how home equity loans works:
Suppose you have purchased a property in 2010 for $650,000.
Loan was 80% = $520,000 amortized over 30 years.
In 2018, a new valuation was done and the property is worth $1 million.
The current loan amount is $440,000.
If this property loan is the only one you have in Singapore, then you may qualify for 80% lending on valuation, which is $800,000.
Equity home loan amount = (80% * valuation) less current loan amount less CPF usage including accrued interest.
Assuming you have used $160,000 CPF with accrued interest, this is the home equity loan amount you would get:
$800,000 – $440,000 – $150,000 = $200,000
Together with the outstanding loan, the total debt on the property now would be $640,000.
People who should consider home equity loans are:
- Owners of second or subsequent investment properties;
- People looking to consolidate their debts;
- Parents who want to help out their children.
Home equity loans are useful for people who are trying to consolidate their loans. The are also helpful for parents who are thinking of helping out their children – either to buy a property of their own, or to get out of a tight situation. If you have multiple properties, loan specialists might be able to work out a solution for you to use Home Equity Loans to invest.
