If you have been researching the many kinds of loans available to you, you may have come across the term “equity term loan.” But can you tell me more about it?
A type of loan known as an equity term loan gives Singaporeans the opportunity to secure financial support against the value of their real estate holdings. This financial alternative may be quite useful for achieving goals like developing your business, increasing the amount of money in your CPF account, or purchasing a new piece of real estate.
In this article, we will discuss the benefits and drawbacks of obtaining an equity term loan, as well as what to expect throughout the application process, eligibility conditions, maximum borrowing limits, and recommendations on how to prudently utilise your cash.
What Is the Difference Between a Term Loan and an Equity Loan?
An equity loan, commonly referred to as cash-out refinancing, is a loan type that permits you to borrow funds against the appraised value of your private property. The specific amount you can borrow is contingent upon your property’s valuation and the lending institution’s policies.
Equity loans are typically employed for significant expenditures, such as purchasing a new property or expanding a business.
In Singapore, the term “equity loan” is sometimes used interchangeably with “term loan.” However, a significant distinction exists:
- Equity loans are obtained after you have completely repaid your existing mortgage.
- Term loans are secured when you still have outstanding debt to settle.
Please note that both equity and term loans are categorised as secured loans, necessitating the use of your property as collateral.
How To Determine If You Are Eligible
Before applying for an equity term loan in Singapore, there are only two essential eligibility criteria to verify:
- You must possess private property that you intend to use as collateral. HDB apartments are not eligible for this type of loan.
- If you own an executive condominium (EC), you must ensure that you have surpassed the Minimum Occupancy Period (MOP) of five years. Only after completing this MOP period will you become eligible for an equity loan.
Checking whether you meet these eligibility conditions is straightforward. You can either review your contract or get in touch with a bank to assess your current documentation.
Considerations That Should Be Made
Before you proceed with your application for a home equity loan in Singapore, it’s prudent to consider the following key factors:
- Mortgage Status: Ensure that your property is completely paid off. If you still have an outstanding mortgage on your property, you will need to opt for a term loan instead. While similar to an equity home loan, a term loan may grant you a lower borrowing amount.
- Property Valuation: Assess the current value of your property. The amount you can borrow will be contingent on your property’s valuation, so having an accurate estimate of its worth is crucial.
- Loan Conditions: Whether you choose an equity home loan or a term loan, the loan tenure is typically calculated by subtracting your age and the remaining tenure of your existing home loan from 75. For instance, if you are 50 years old and obtained a bank loan for your current property 10 years ago, the remaining term would be 15 years.
Why is this condition significant?
Longer tenures result in lower monthly instalments, making them more manageable within your budget. However, it’s important to note that extended tenures also translate to greater interest accruing over the loan’s duration.
Pros And Cons
Now that we’ve clarified the concept of an equity term loan, it’s essential to explore the pros and cons of cash-out refinancing in Singapore. As with any financial decision, there are advantages and disadvantages to consider before making your choice.
Advantages
- Versatile Usage: You have the flexibility to use the loan for a variety of purposes, whether it’s expanding your business, making home improvements, or investing.
- Lower Interest Rates: Typically, equity term loans offer lower interest rates compared to unsecured loans like personal loans.
- Tax Benefits: If the loan is employed for business purposes, you may be eligible for tax deductions on your monthly repayments.
- Property Value Appreciation: Banks are more inclined to offer this type of loan if the value of your property has significantly increased since your initial
Disadvantages
- Ineligible for HDB Flats: Equity term loans are not available for HDB flats.
- Property Risk: Defaulting on the loan puts your property at risk, as it serves as collateral.
- Borrowed Amount May Differ: The amount you receive may not align with your expectations, considering associated fees, existing loans, and your credit score.
- Property Valuation by Bank: The current market value of your property is determined by the bank, so thorough research is crucial when selecting a lender. Be sure to evaluate all loan conditions, from interest rates to loan tenures, to make an informed decision.
How Much Can You Cash Out?
If you meet the criteria, an equity term loan enables you to access approximately 70-80% of your property’s current value.
Consider this scenario: Suppose you purchased a private apartment for $500,000 back in 2006, and its current market value is $800,000.
The bank’s loan will typically cover 75% of the loan-to-value ratio based on the current market value of $800,000, similar to how it did in 2006. However, now that the principal amount is calculated from a higher figure, your eligible loan amount will be $600,000.
The Total Debt Servicing Ratio (TDSR) plays a crucial role. It measures the portion of your monthly income allocated to debt repayments.
For instance, if your monthly income amounts to $12,000 and you are currently servicing a $2,000 car loan along with a $2,000 personal loan instalment, your TDSR stands at 33%. This signifies that one-third of your monthly earnings go toward repaying debts.
The maximum allowable TDSR in Singapore is 55%. Therefore, in this scenario, your equity term loan instalment cannot exceed 22% of your gross monthly income. If you can only commit $2,640 to your equity loan, and your loan tenure is limited to 10 years, this reduces the maximum loan amount you qualify for to $316,800.
Warning: If your credit score is less than ideal, the bank may offer an even lower amount.
Additionally, you must deduct specific expenses from this amount:
- Any remaining loan balance, if you have not fully disbursed it.
- Any outstanding CPF amounts related to the property purchase.
So, if you still owe $100,000 from your loan and have utilised $100,000 of your CPF for the down payment or monthly mortgage, you may only access $116,800.
However, if you don’t have any other loan instalments or age-related tenure restrictions, you could potentially qualify for up to $400,000.
Next, there are associated costs to consider. The bank typically charges for legal and valuation services, which typically range from $3,000 to $4,000.
Please note that paying $4,000 out of a $400,000 loan amount (as in our previous example) for administrative fees may be justified, as this expense represents only 1% of your loan. However, if you are eligible for the lower amount of $116,800, paying these administrative fees might not be as worthwhile.
What Is The Best Way To Invest The Extra Cash?
The beauty of an equity term loan lies in its versatility, as you can allocate the funds to a wide range of purposes. Whether you aim to invest in a new business venture, undertake home renovations, or even acquire a new vehicle, the choice is yours.
However, it’s essential to bear in mind that defaulting on the loan puts your property at risk, making your decision a critical one. Splurging on a new car or an extravagant vacation may not be the most prudent use of an equity term loan.
Pro tip: Consider utilising the extra funds for endeavours that contribute to your long-term wealth or enhance your current financial situation.
For instance, this type of loan can be advantageous if you’ve experienced a job loss or retrenchment, given the typically low-interest rates. You can also deploy the funds wisely by launching a business (after thorough feasibility research and a comprehensive business plan) or constructing a passive investment portfolio.
Read Also: How to Earn Passive Income in Singapore?
Think About What You Can Do Well
Equity term loans can help with difficult times or needed investments. It frequently costs less than personal or commercial loans because of its lower interest rates and longer periods.
Comprehensive research is needed before taking out an equity term loan. Use it prudently. You should consider other loans if this one doesn’t fit your financial goals.
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