Personal Finance

What Is Equity In A Housing Loan And How Can You Make Use Of It?

February 9, 2023

What is equity in housing loan? This is an important question that you may ask when taking out a loan to purchase a home.

This article will explore what equity in housing loan is, how you can utilise it, and how you can make the most of it.

By understanding what equity in housing loan is and how you can use it, you can make informed decisions and take advantage of the benefits that it can provide.

What Is Equity In Housing Loan?

When it comes to the question what is equity in housing loan, it refers to the difference between the current market value of a property and the outstanding balance on a mortgage loan.

In other words, it is the portion of the property that you, as a homeowner, own outright and is not encumbered by a mortgage.

For example, if you have a property with a market value of $300,000 and an outstanding mortgage balance of $200,000, you have $100,000 in equity. This equity can be used as collateral for a loan, such as a home equity loan or a home equity line of credit.

Having equity in property provides you with financial flexibility and can be used to secure loans at lower interest rates than unsecured loans.

However, it’s crucial to remember that using equity to secure a loan increases the overall debt on the property and may put you at risk of losing the property if you cannot make payments.

What Is A Home Equity Loan Or Cash Out Refinancing?

With home equity or cash out financing, you can use your completely paid private property as security for a one-time cash loan. HDB flat owners are not eligible for this option – only private property owners are.

Let’s consider a scenario where you have bought a condo for $500,000 and have since paid off the entire loan. Today, the condo’s value has appreciated to $1.2 million.

This is great news, but the challenge is accessing the profit made. In most cases, selling the property is the only option. However, if you are comfortable living there, you may want to avoid selling.

A cash out refinance Singapore offers an alternative solution. You can borrow, for example, half the value of the property, which is $600,000, and use the condo as collateral for the loan. Being a secured loan, the interest rate for cash out refinance is low, usually around 1.6% per annum.

Uses Of Home Equity Loans

Here are some common uses of home equity loans:

  • Home improvement: Home equity loans can finance renovation, remodelling, and improvement projects.
  • Debt consolidation: You can use a home equity loan to pay off high-interest debt such as credit card balances or personal loans by consolidating it into a single, lower-interest loan.
  • Major expenses: Home equity loans can also be used for big-ticket financing items, such as a new car, a wedding, or a college education.
  • Emergency funds: In some cases, you may use a home equity loan to cover unexpected expenses such as medical bills.

It is vital to note that while a home equity loan can be a useful tool for accessing funds, it also involves using your home as collateral and increases your overall debt.

Therefore, you should carefully consider the terms and conditions of the loan and your ability to repay it before taking one out.

Restrictions On Home Equity Loans

Restrictions on home equity loans generally depend on the specific loan terms, but in general, the restrictions may include the following:

TDSR Requirements

When applying for a home equity loan, you must consider the Total Debt Servicing Ratio (TDSR) requirements. The TDSR limits your monthly debt repayments to 55% of your monthly income.

However, if your property is fully paid up and you’re borrowing no more than 50% of the property value, you are exempt from the TDSR requirements.

Loan Tenure

There is a restriction on the maximum loan tenure of a home equity loan. The loan can either be for a maximum of 35 years or until you reach 75 years, whichever period is shorter.

Property Purchase Restrictions

According to the Monetary Authority of Singapore, you cannot use home equity loans to purchase another property. However, there have been instances where you can use a home equity loan to pay off an outstanding housing loan.

For example, suppose you have a fully paid-up home valued at $1 million and an investment property with an outstanding loan of $250,000.

In that case, you can take a home equity loan on your fully paid-up property and use the funds to pay off the outstanding loan on the investment property.

Home Equity Loan Vs Equity Term Loan

Although the terms home equity loan and equity term loan may seem alike, they serve distinct purposes.

The main difference between them is that a home equity loan is taken out on a fully paid-for property, while a term loan is taken out on a property that still needs to be fully paid for.

When taking out a term loan Singapore, you are using the equity in your property as collateral for the loan. This allows you to borrow at a low interest rate if your property has been appreciated.

To determine if this is the right option for you, you need to assess the current value of your property. You can borrow on the increase and maintain your existing loan if it has increased in value.

Even if your home isn’t fully paid off, you can still take advantage of your property’s equity. Known as a mortgage equity withdrawal loan or cash out refinancing, this type of loan allows you to borrow against the fully paid portion of your home.

Should You Get A Home Equity Loan?

Once you have an idea of what is equity in housing loan, then you can take a home equity loan. However, there are three things to consider.

Property Value

The value of your property is a major factor to consider. If your home has appreciated, a home equity loan may allow you to unlock some of the capital appreciation without selling it.

Risk Level

When considering a home equity loan, it’s essential to consider the risk level involved. As the bank holds your property as collateral, home equity loans often have low interest rates. However, you could risk losing your home if you cannot repay the loan.

Purpose Of Loan

Before applying for a home equity loan, think about why you need the money.

A home equity loan could make sense if you’re planning to use it for a new business venture or investment. But a personal or renovation loan may be a better option for expenses such as renovations.

How To Apply For A Home Equity Loan

To apply for a Singapore home equity loan, follow these steps:

  • Determine your eligibility: Before applying, make sure you meet the eligibility criteria the lender sets. This includes requirements such as your property’s value, income, and credit score.
  • Research lenders: Look for reputable lenders offering an equity home loan. You can compare interest rates, repayment terms, and other features to find the best deal.
  • Gather the required documentation: Most lenders will require documents such as proof of income, proof of property ownership, and your credit report. Make sure you have all the necessary documents ready before you apply.
  • Complete the loan application: Fill out the loan application form provided by the lender. Ensure you provide accurate information, and understand the terms and conditions of the loan.
  • Apply: Submit the loan application and all the required documentation to the lender.
  • Wait for approval: After submitting your application, the lender will review it and perform a credit check. You’ll receive a loan offer detailing the loan amount, interest rate, and repayment terms if approved.

Note: It is always advisable to seek advice from a financial advisor before taking out a home equity loan Singapore to ensure that it suits your financial needs and circumstances.

Get The Best Home Equity Loan In Singapore

So what is equity in housing loan? It’s a great benefit for you if you want to leverage the equity in your home to get additional financing for renovations, debt consolidation, or to invest in other properties.

The key is understanding what equity is, how it works and how you can use it. You should always consult a licensed professional to learn more about what is equity in housing loan and how it can benefit you.

If you need a loan, stop struggling with financial difficulties and start securing the funds you need with GS Credit.

As a licensed money lender in Singapore, we offer flexible loan options and competitive interest rates to help you achieve your financial goals.

Whether you need to consolidate debt, finance a major purchase, or cover unexpected expenses, we have the solution for you. Contact us now or apply for a loan today.

Frequently Asked Questions

Who Is Eligible For A Home Equity Loan?

In Singapore, only private property owners are eligible for home equity loans. HDB flat owners are not eligible for cash out refinancing in Singapore.

Executive condominium owners must wait until their five-year Minimum Occupation Period ends before considering a cash out refinancing. The outstanding home loan must be from the same bank to obtain a home equity loan.

For example, an OCBC home loan can only be refinanced with an OCBC home equity loan.

What Is The Interest Rate For A Home Equity Loan?

Home equity loans offer a competitive advantage in terms of interest rates, with rates as low as 1% or slightly higher.

On the other hand, other types of loans, such as renovation loans, business term loans, debt consolidation plans, and education loans, tend to have higher interest rates, making home equity loans a more favourable option.

How Long Does It Take To Get A Home Equity Loan Approved?

The process of obtaining a home equity loan can take considerable time, usually around two months. However, if you have an existing home loan with a bank, the approval process can take up to four months.

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