Cashing out home equity can over-expose you should housing prices fall
A home equity 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.
Many people use a mortgage refinance as an opportunity to borrow against their home equity, taking out some cash for things like for home repairs, investments or a major purchase. Because the rates are low compared to other types of loans and mortgage interest is usually tax-deductible, it’s an attractive way to borrow money.
Cashing out home equity can get you into trouble if housing prices fall
The problem arises when homeowners take out too much equity that they leave themselves exposed should housing prices fall (as happened dramatically in recent years) or boost their mortgage payments so much that they have almost no margin for error if financial problems arise. Be conservative in taking any money out of your home and be sure to leave yourself a healthy cushion when cashing out home equity.
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, cashing out home equity can only be done for private properties.
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.
Cashing out home equity can be 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, iCompareLoan might be able to work out a solution for you to use Home Equity Loans to invest.
Cashing out home equity can be useful for corporate financing
As a high number of applications for SME loans are unsuccessful, it is important for passionate business-owners to consider term loans to grow and sustain their business operations. It is also important for them to work with trusted hands, and with people who know the industry.
One recent research report said that up to 81 per cent of SMEs in Singapore do not qualify for business financing. Many applications for bank loans are delayed or rejected because business owners are not familiar with the qualifications for the loans or of how to apply for such loans.
Access to crucial credit facility is often hindered by the lack the relevant financial knowledge and / or the resources to engage professional business consultancy services to manage and address their obligations and financial liabilities as business owners. The terrain to apply and qualify for loans is also uneven because creditors are not just banks but finance companies and other licensed lending entities whose security arrangements may be different or more complicated.
If you are thinking of cashing out home equity talk to mortgage brokers. Trustworthy mortgage brokers can set you up on a path that can get you a home loan in a quick and seamless manner. They are the experts who do the work for you for free, while you lean back, rest and rely on their professionalism at absolutely no cost to you.
Mortgage brokers have close links with the best lenders in town and can help you compare Singapore home loans and settle for a package that best suits your home purchase needs. You should also find out about money saving tips.
Whether you are looking for a new home loan or to refinance, the Mortgage broker can help you get everything right from calculating mortgage repayment, comparing interest rates all through to securing the best home loans in Singapore. And the good thing is that all their services are free of charge. So it’s all worth it to secure a loan through them.