Home Equity Loan, also known as Equity Loan or Equity Term Loan, is a loan secured against the value of your property. It is considered a secure loan, as it uses your property as collateral. As such, the interest rate is more attractive as compared to car loan, business loan or the personal loan rate.

Let’s assume you bought your property in 2006. The value of that property would have appreciated significantly. You are thus able to take a loan on the appreciated portion, plus the portion which you have fully paid for.

How much can I borrow with Home Equity Loan?

Theoretically, you can borrow 70% to 75% of the value (depending on banks) of your property as per the formula below:

Home Equity Loan = 75% x Value of Property – Outstanding Mortgage Loan – CPF Monies Used

You will be subjected to the Total Debt Servicing Ratio (TDSR). Under MAS regulations, your monthly debt obligations cannot exceed 60% of your monthly income.

Who Is Eligible For Home Equity Loan?

In Singapore, only owners of private property are eligible for Home Equity Loan. Owners of Executive Condominiums are eligible only after they have met the Minimum Occupation Period (ie. 5 years).

HDB properties cannot be used as collaterals for Home Equity Loan.

What Is the Interest Rate for Home Equity Loan?

Home Equity Loan carries the same interest rates as Mortgage Loan. Mortgage Loan interest rate is at a low now. It is a good time to take up Home Equity Loan to tide over this crisis if there is a need.

What Is The Tenure For Home Equity Loan?

The maximum tenure is:

1) 75 – (Your age)

or

2) 35 – (Number of years since first loan) – (1 additional year)

whichever is lower.

Do note that that you cannot use CPF to service Home Equity Loan.

Home Equity Loan is a good way to get cash at low-interest rate. Owners who are eligible can use this method to tide over their cash flow situation.

One important thing to note is this. As your property is being used as collateral for the loan, the bank has the right to seize your property if you default on your instalments. Therefore owners must be diligent in making monthly repayments.

Interest rate for mortgage loan has dropped to a low since US Fed announced emergency cut in their interest rates.

Current interest rates range between 1.5% to 1.8%.

Property owners who are eligible to refinance should do so to enjoy lower interest rate and monthly instalment.

Mortgage loan packages typically have a lock-in period. Property owners whose mortgage loan is still under the lock-in period can always check with their bank if they can do a repricing. In times of crisis like this, banks might just consider your request.

You may want to read more on refinancing and mortgage loan interest here: Why You Should Refinance Your Mortgage Loan.

Under MAS regulations, property owners can refinance and stretch your loan tenure to 35 years, or till you are 75 years old, whichever is lower.

By stretching your loan tenure, you can pay lower monthly instalment to tide over the difficult period.

For example, I met up with a client recently – let’s call him Mr Lim. Mr Lim is a restaurant owner and his business has been badly affected by the Covid-19 crisis. Mr Lim lives in a landed property. He is in the third year of his mortgage loan package and pays around $9,000 per month for his monthly instalment. He is facing cash flow problem now due to declining business.

I proposed to do a refinancing on his mortgage. He took up a new mortgage loan from Citibank at 1.5% interest rate and stretched the loan tenure to 32 years. His monthly instalment greatly reduces to slightly above $6,200.

Once the crisis is over and Mr Lim finds himself in a more comfortable financial situation, he can do partial repayment to pay down the loan and lower the interest costs.

The Monetary Authority of Singapore (MAS) has announced a package of measures to help ease the financial strains of individuals and SMEs caused by the Covid-19 crisis.

One of the measures allow property owners to defer repayment on their residential property loans. You may choose to defer the principal amount and/or principal amount + interests payment till 31 Dec 2020.

Do note that interest will accrue on the deferred principal amount, but no interest will be charged on the deferred interest payments. As long as property owners are not in arrears for more than 90 days, banks will approve the request.

You may want to read more here.

As mentioned in the first method, property owners can tap into the equity of their property to get funds through the Home Equity Loan. However they are subjected to TDSR, which restrict them to monthly debt obligations of not more than 60% of their monthly salaries.

What about property owners who are retirees? Or owners who have been retrenched during this crisis and are not drawing any salary? This method might just be for you.

To use this method, you must have an outstanding mortgage loan of not more than 50% of the valuation of your property. You can then apply for Home Equity Loan and not be subjected to TDSR.

The last method is to sell your property and cash out. Careful financial calculations must be done to ensure it is worth the move.

Funds released from the sale of the property can then be made towards a smaller property.

Another option is to rent temporarily while waiting for the right opportunity to invest in another property.

Text: Anna V. Haotano/The New Savvy

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