Ravi Chandran
Home equity loan are also called cash-out refinancing, or a second mortgage.
By: Hitesh Khan/
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 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, iCompareLoan might be able to work out a solution for you to use Home Equity Loans to invest.
People looking to consolidate their debts
Forget what other personal finance websites tell you: no amount of saving on Starbucks coffee is likely to fix a major debt problem. If you owe, say, 12 months of your income, trying to go on budget now is like putting Tiger Balm on three broken ribs.
Typically, in such dire straits, the solution is to sell your house a downgrade. But you can consider a home equity loan as an alternative.
Let’s say you have $150,000 in unsecured loans, growing at about 24 per cent per annum (typical for credit cards). However, you have a house that’s almost entirely paid up; and it’s worth about $1.3 million, having appreciated over time.
You could take a home equity loan, borrowing $150,000 against your house, at just 1.3 per cent per annum. You then use the $150,000 to pay off all your other unsecured loans, thus consolidating all that high-interest debt into a single, low-interest home equity loan.
This reduces your monthly repayments to manageable levels, without you having to sell the house.
Parents who want to help out their children
If you have reliable income sources, and want to help your children, a home equity loan can be the better option.
For example, if you have a paid-up condo worth $1 million, you can easily borrow up to $500,000 with a home equity loan (you won’t need to meet TDSR restrictions under the new rules). At 1.3 per cent per annum, this is cheaper than taking an education loan to send your kids to Harvard or wherever. It’s also cheaper than a HDB loan (2.6 per cent per annum), so you can help them buy a flat.
This is especially useful if you’re sitting on an appreciating property; you can finance your children’s aspirations, without having to lose a good retirement asset.”
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