Home Equity Loan & Cash Out Refinancing in Singapore (2021)

Need to borrow a large sum of money without resorting to a personal loan? Well, you might want to consider a home equity loan, which lets you borrow against the value of your private property. It's even possible do this while still paying the mortgage. But is it worth it to "cash out" your home like that? Here's a guide to home equity loans in Singapore.

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What is a Home Equity Loan?

Home equity loans come in many guises. Sometimes they are called "cash out refinancing", "property equity financing", "mortgage equity withdrawal loan" and so on. Whatever they are called, home equity loans are united by one feature: You will be offering your home as collateral. As you pay off your mortgage, you increase equity (ownership) of your home, so a home equity loan simply means that borrowing against your equity in the property. Now, if that's not unpalatable, bear in mind that the following restrictions also apply:

Private Property Only

Sorry, HDB flat owners. You are not allowed to transform your flat into a sum of cash. Home equity loans are available only for private property, and even so, it's still subject to careful consideration by the bank. Your best bet is a fully paid-up private property, preferably one that has appreciated in value over the years.

Home Equity Loan Limits

Unfortunately, you can't borrow the entire value of your $2 million condo. First you will have to subtract any outstanding home loan and any CPF that was used to pay for it. The final amount you can borrow is subject to bank approval, but it won't be 100% of what's left - more like 80%. Finally, you will still be subject to general regulatory limits like total debt servicing ratio (TDSR).

Loan Application Costs

At this point we should note that getting a home equity loan is a rather cumbersome and expensive affair. You will need to pay a few thousand dollars for the (compulsory) property valuation upfront. It also takes at least about 2 months to secure a home equity loan, so it's definitely not for emergency needs.

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Should You Get a Home Equity Loan? 3 Considerations

Risk Level

Home equity loans have very low interest rates because the bank holds your property as collateral - and very few people are willing to default on their loan when their home is at stake! However, offering your home as collateral is not for everyone. Should you be unable to repay, you could literally lose the roof over your head.

Purpose of Loan

Depending on why you need that sum of money, a home equity loan may or may not make sense. Many borrowers use it to fund new business ventures or investments, while others use the money to pay off existing debt. For other purposes like a renovations or a wedding, you may want to consider a personal loan or renovation loan instead.

Property Value

A home equity loan may be particularly suitable if your home has appreciated in value. For example, if you bought a S$1m condo unit and it's now S$2m, you can now unlock some of the capital appreciation without having to sell off the apartment.

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How to Apply for a Home Equity Loan

Applying for a home equity loan can be tedious, because interest rates and packages are generally not published online. You will need to enquire at various banks (by phone or in person). At MoneySmart, we make the loan application process simple for you. All you have to do is provide us with your details, and we’ll take care of the rest. This means we’ll be checking all bridging home equity packages available in the market, and give a recommendation that works best for you. Should you decide to proceed with your home equity loan, you will need to pay for a property valuation. You will then be given an approved loan amount.

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Frequently Asked Questions

How does the home equity loan work?

A home equity loan, or cash out refinancing, is where the bank lends you a sum of money, using your equity in your home as collateral. While the loan is in effect, the bank theoretically has part-ownership (equity) of your home.

How much can you borrow on a home equity loan?

The home equity loan amount is determined by the value of the property (which is why property valuation is compulsory) less CPF and outstanding mortgage. You may not be able to borrow the full amount.

What is better home equity loan or line of credit?

A home equity loan is sometimes thought of as an alternative to unsecured loans such as credit cards or personal lines of credit. Each has pros and cons. A home equity loan has very low interest rates, but you risk losing your home if unable to repay. Meanwhile, a personal line of credit is an unsecured loan, but you will have to contend with much double-digit interest rates.

What are the drawbacks of a home equity loan?

The main drawback of a home equity loan is the fact that your property ownership is now held as collateral. If you have multiple properties, that may be acceptable. However, if the property is the roof over your head, it may be too risky.