Personal Finance

How Do You Get An Equity Term Loan?

January 19, 2023

To “cash out” the value of your property and borrow a large sum, you can apply for an equity term loan.

If you own a private property, an equity term loan may be a suitable option if you want to unlock the equity you’ve accumulated so far. 

With collateral on a loan, the interest rate is lower than it’d be with a personal loan or another unsecured loan. The ability to withdraw large sums of money is another perk.

A well-managed home equity loan in Singapore has various uses. However, careless use could put your property and investments at risk.

Let’s look at everything you need to know about an equity term loan.

What Is An Equity Term Loan Or Home Equity Loan?

An equity term loan allows you to borrow against a property that is not fully paid for. 

An equity loan or home equity loan allows you to borrow against a property that has been fully paid for.

When you buy a home, the value of the property increases over time as you make payments toward it. This increase in value is referred to as equity.

With an equity term loan, you’re actually borrowing against the equity that has accumulated over time.

To know the current value of your property, you have to employ the services of property valuators, who are professionals in determining the current value of a property.

Often, the bank or loan provider you’re borrowing from will provide you with a property valuation before you are granted the term loan or equity home loan.

The equity in your property serves as collateral when you take a term loan. 

Suppose the value of your home has increased significantly after you first obtained financing. 

In that case, you may take a loan against that growth while continuing to make payments on your original mortgage.

How To Check Your Eligibility 

If you have equity in your private property, you may qualify for a home equity term loan in Singapore. The only bad news is that you can’t get a cash-out to refinance if you only own an HDB flat.

Those with outstanding balances on their current mortgage loans must use the same financial institution when applying for a new term loan. If a bank holds your existing mortgage, you’d need to secure your replacement financing from the same lender.

You can apply for an equity term loan if you own an executive condominium, but only if the five-year Minimum Occupation Period (MOP) is over.

Keep in mind that if your property has been fully paid for, you can take out an equity loan from any bank. 

But if you still have a mortgage balance with the same bank and want to refinance using your home’s equity as collateral, you can only do so by taking out an equity term loan.

Factors To Consider When Getting An Equity Term Loan

Home equity loans and equity term loans in Singapore both rely on the value of your property as collateral. So lenders will be more willing to extend you a larger loan if that value rises significantly. 

These loans, which feature a low mortgage interest rate, can be used for various other purposes. That includes diversifying an existing investment portfolio, starting a business, or meeting an unexpected expense.

Note that the initial costs for these loans are high. The administrative and legal fees associated with obtaining a property valuation can total $2,000 to $4,000. 

You won’t be able to avoid these expenses if you get a loan based on the value of your home via an equity term loan or home equity loan. 

So knowing how much money you’ll need to borrow in advance is crucial.

You also need to consider the loan tenure for a term loan or home equity loan. It is 75 years minus your age and the number of years you have spent paying your home loan. 

So if you are 45 years old and have already spent 10 years paying off your existing home loan, your loan tenure will be 20 years. This is calculated as 75 – 45 – 10 = 20.

Lastly, you must decide if you can make the monthly repayments. If you can’t, you risk losing your property. 

Pros And Cons Of An Equity Term Loan

Is an equity term loan a good option? Here are its advantages and disadvantages.

Pros

  • Large sum of money: You can get a big sum – up to 80% of your property’s value. This can come in handy if you need to make a big purchase or want to consolidate your debts.
  • Low interest rate: The 1-2% interest rate is usually lower than that of personal loans and credit cards. This makes it easier to repay the loan amount.
  • Flexibility: You can use the money however you want. There are no restrictions on how you spend the money.
  • Long repayment period: You get more than sufficient time to repay your loan.

Cons

  • Risk level: Few would risk defaulting on the loan when their home is at risk. But not everyone can put up their home as security. If you can’t make payments, you could lose your home.
  • Not applicable for HDB flats: HDB flats are not to be sold for profit under any circumstances. Home equity loans are only available to private property owners. Even then, the loan application must pass the bank’s scrutiny. Private real estate that has already been paid off is your best bet, especially if its value has increased.
  • Costly fees: Taking out an equity term loan is time-consuming and costly. A few thousand dollars are due for the required property evaluation. 
  • Long processing time: Obtaining an equity term loan can take up to two months, meaning the money cannot be used for emergency expenses.

How Much Can You Cash Out?

You can’t withdraw the money you used from CPF for downpayment and mortgage payments.

To qualify for a home equity loan, your loan-to-value (LTV) ratio must be at or below 25%. 

Therefore, you can borrow no more than 70-80% of your home’s worth of your property’s current market value. 

Banks usually allow you to cash out 70-80% of your: 

  • Outstanding loan on your property (if any)
  • CPF funds used to buy the property

The bank will determine your property’s market value by using the following equation to calculate how much you can cash out: 

Your property’s market price – Your outstanding home loan – CPF funds used to pay off the property = Your equity term loan amount

To determine your property’s valuation, you might need to employ a third-party appraiser.

Secondly, you will incur some costs, so make sure you have factored in those as well. Remember that banks can charge a processing fee that ranges from $1,500 to $4,000.

How Should You Use The Extra Cash? 

There are a few other ways you could use your extra cash from a equity term loan. Here are some:

Renovation

Improving your home will not only make it a more desirable place to live, but it may also increase its market value. 

Properties for sale on real estate websites are aplenty, so if you plan on selling yours shortly, you’ll need to make it stand out from the crowd.

Funding A Business, Wedding, Or Higher Education

It may not make sense to use a home equity loan to cover local college fees. That’s given that local banks offer “interest-free” loans to students while they are enrolled in school.

Rather than taking out a normal loan specifically for studying abroad, you may consider taking an equity term loan instead as it is cheaper.

You can also use it for a wedding or business loan.

Overcoming Debt

Cash-out refinancing can be used to consolidate high-interest credit card debt into one manageable monthly payment.

However, you should be aware that doing so may convert your unsecured debt into secured debt. It will also put your property up as collateral if you default on your payments.

On the other hand, if you need to pay off high-interest unsecured personal loans or substantial credit card debt, an equity term loan may be your best shot.

To Tide Over Rough Times

A home equity loan may be one of the cost-effective ways to get the money you need to cover your family’s daily expenses. 

That’s especially if you faced tough financial times during the Covid-19 recession. However, it is best to be sure you can afford the regular payments.

Is An Equity Term Loan Your Best Choice?

If selling your home or renting out rooms are not valid options, an equity term loan is one of the few alternatives to generate income. 

Sometimes, it even allows you to borrow a substantial sum of money for your normal expenses. This is one of the main advantages of owning a private property rather than living in an HDB flat.

In the end, whether or not a home equity loan or equity term loan is right for you depends on why you need the money. Many people who borrow money use it to start new businesses or make investments. 

Others use it to pay off debts they already have. For home improvements or a wedding, you might want to look into a personal loan or a renovation loan. 

But equity loans on homes should be handled cautiously and purposefully. To know if this is the best option, you should consult home loan specialists and financial advisors. 

With GS Credit, you can get a personal loan for property-related needs. 

We are a trusted licensed money lender in Singapore that offers some of the most affordable interest rates and fees. We would be more than happy to help you in any way we can.

Contact us today or apply for a loan using your Singpass now. The entire process only takes five minutes.

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