also known as Home Equity Loan, Gearing Up Loan
A term loan, home equity loan or equity term loan means the same thing. When you take a term loan, you use the equity of your property as collateral. So if your property has increased in value over time, a home equity loan may be the best way to borrow some money at a low interest rate.
How this is done is that you basically re-assess the value of your property at present day and if there has been a sufficient increase in value over what it was when you first bought it, you might be able to loan a portion of that increase in value on top of your existing loan.
You can also do this even if you haven’t paid off your home loan in full. In effect, you are borrowing from the portion of your property that is fully paid. This is known as cash out refinancing, or mortgage equity withdrawal loans.
EQUITY LOAN = TERM LOAN = GEARING UP LOAN
How much can you borrow?
Typically, the bank will allow you to borrow up to 80% of your property value. But first you would need to minus any outstanding loan amounts, as well as any CPF used for the property purchase.
You will also be limited by the total debt servicing ratio (better known as TDSR), which means your loan repayments cannot be more than 60% of your monthly income.
For Example, Based on a Valuation of SGD$1.25 million, $600,000 CPF used and $250,000 outstanding amount
|Property component||Home equity loan amount|
|80% of property valuation||80% x $1.25million = $1 million|
|Outstanding home loan||$250,000|
|CPF used for property purchase||$600,000|
|Maximum term loan||$1 million – $250,000 – $600,000 = $150,000|
Should you apply for an Equity Loan?
If you need a large sum of money to renovate your home, get startup capital, or finance your child’s higher education, a home equity loan is quite ideal as the interest rates are low and you can get quite a high loan amount.
In all these cases, the alternative options will have either higher interest rates, or a lower loan amount, or both.
In Singapore, only owners of private property are eligible to take home equity loans. So, if your only property is an HDB flat, you won’t be eligible for cash out refinancing.
If you own an Executive Condominium, you have to wait till your Minimum Occupation Period of 5 years runs out before you can consider cash out refinancing.
If you still have an outstanding home loan, you can only get the home equity loan from the same bank you have taken the home loan from. For instance, if you currently have an OCBC home loan, you can only get an OCBC home equity loan.
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