Have you considered existing assets if you require more money for home improvements, an investment opportunity or to pay off those high-interest credit cards?
By: Hitesh Khan/
If you require more money, you may be surprised at how many different ways there are to use your existing assets to get a good loan.
Here are five types existing assets you can use to get more money:
THE EQUITY IN YOUR HOME
Your home is an existing asset. By borrowing against the value of your private residential property, a figure that has risen substantially in the past few years, you can get a substantial sum at favorable rates. Consider a home-equity line of credit instead of a home-equity loan if you need money available for recurring expenses. That way you can withdraw money as needed and only pay interest on what you owe.
If you have financial discipline and are willing to put your house at risk, home equity loan could be a fix for debt riddance. There are pluses, such as a lower interest rate and the deductibility of the interest payments. And a home equity loan can be relatively fast compared to a full-blown mortgage loan.
A home equity loan is also called cash-out refinancing, or a second mortgage. 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.
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 loan can only be gotten for private a private property, HDB is not allowed.
HDB says, “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.“
This is how home equity loan 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.
YOUR STOCK PORTFOLIO
If you own stocks, bonds or mutual funds, you can take out what’s known as a margin loan from a stockbroker for up to half the value of your securities. The interest you’ll pay is deductible up to the amount of income you earn on the loan amount unless the securities are tax-exempt. If the value of your securities drops, your broker may demand more of your portfolio as collateral. Stay on the safe side and don’t borrow more than 20 percent of your portfolio’s value.
YOUR LIFE INSURANCE POLICY
Many people are not aware that insurance policies are existing assets. If you own a whole, universal or variable life insurance policy you can borrow the amount of the policy’s cash value. But be mindful that if you don’t repay the principal the outstanding debt, this will simply be withdrawn from your death benefit, which may hurt you later in life when a valuable policy can hedge against rising premiums.
Even your relationship with your banks can be existing assets. Try the branch where you have a savings or business account or a credit cooperative. Regular customers sometimes earn rates of 1 or 2 percentage points below those for non-customers. An unsecured personal loan will come with a higher rate, but it may still be lower than what you’re paying on your credit cards. If you secure the loan, you can earn a lower rate and you may be able to borrow against a relatively new asset.
RELATIVES AND FRIENDS
Don’t borrow from friends and family long-term; you’ll fray your relationships. But don’t discount a personal loan, either. You may be able to pay a higher rate than your relative would earn on money if it were to remain in a bank account and the interest will still be far less than on a credit card.