With the global recession and current Covid-19 pandemic, many business owners and individuals are strapped for cash. What's even more frustrating is to have assets in the form of properties or a home but no active income on a monthly basis. There are, for instance, plenty of retirees who struggle to make ends meet every other month, yet own million-dollar condominiums that they can't seem to sell. If you’re in Singapore, there's a possible solution to this dilemma, and it comes in the form of a property loan.
As far as home financing in Singapore goes, your home equity represents a potentially empowering financial tool that can be used to help fund a range of endeavours. Whether you'd like to pay down credit card debt or get extra money for home renovations, you can consider using the equity in your home. Here are several things to take note of before you apply for a home equity loan.
What is a home equity loan?
A home equity loan is often called cash-out refinancing, or a second mortgage. Banks usually avoid the word "mortgage" for marketing reasons, so you'll rarely hear them say so.
You can borrow money with home equity while using your house as collateral. It's not as terrible an idea as it sounds, in fact, it could be one of the most effective financial decisions you make depending on the situation. You see, if you run out of funds but have a valuable house, then selling and downgrading is your usual choice. But a home equity loan allows you to make money out of your home, without losing it. There are plenty of other benefits: the bank feels much more secure when your house is the collateral; they know that you can't exactly pack up your house and run away with it.
They are considered low-risk
Because there is something on which they can foreclose, banks view home equity loans as low-risk, secured loans. As a direct result, they consider charging a super-low rate of interest. That extremely-low interest rate means that home equity loans are rather affordable, and could provide a much larger loan than, say, a personal instalment loan. Most other, unsecured loans could only lend you an amount equivalent to up to four times your monthly salary.
In addition to this, the government recently made regulatory modifications to restrictions on home equity loans. If your home is already paid in full, you can borrow up to half of its value without actually meeting the restrictions on Total Debt Servicing Ratio (TDSR). Home equity loans can, however, unfortunately only be used for private properties.
Consider all possible options first
Whether you're considering refinancing your mortgage or taking out a house equity loan to deal with increased costs, a drop in income, or for some other reason, it's important to look at all your possible choices. While some consumers may be able to use home equity as a good option, it can put others in trouble with an increased financial risk down the road. If your financial situation doesn't recover as fast as expected or if your home loses value and you're having trouble paying your loan, you might lose your home to foreclosure.
Always ensure that a detailed financial planning is done before you consider a home equity loan, or seek professional advice before you proceed.
Home equity loans are different from a home equity line of credit
An alternative to borrowing from your home equity is to take out a lump sum as you need funds. Home equity credit lines or overdraft (OD tagged to property) also provide a credit line with a credit limit. Usually banks charge overdraft tagged to property prime rate plus a fixed margin. Bank Prime rates usually are at 5% per annum.
There are a couple of major differences between the two financing options. In the case of an overdraft line tagged to property, interest is only applied to the amount you owe, not to the unused portion of the line. Interest rates are also likely to vary, based on the prime rate (or other index) plus a fixed margin. If the index on which your rate is based goes up or down, the interest rate will, too.
And usually an overdraft limit will come with an annual fee charged for the line.
Homeownership is possibly on the line
When people undertake a home equity loan, the cash equivalent of the value of their current homeownership is effectively borrowed. So, for example, in a situation in which a property owner has paid back 25 per cent of their mortgage value (which is 50% of the home value taking into consideration of the 25% upfront payment needed for the purchase), they might be able to borrow up to a similar monetary worth as part of a home equity loan, which you could think of as equity money.
Another scenario is when the property value has increased, and the owner can loan up to 75% of the property value after deducting the CPF usage and outstanding loan of the property and of course, this is subject to Totat Debt Servicing Ratio (TDSR) assessment.
Basically, the property itself is the collateral for a house equity loan. When individuals borrow money in proportion to their equity, they acknowledge that failure to repay these funds effectively revokes their property ownership. With all this in mind, home equity loans have severe repercussions attached to them for non-payment, much like a mortgage.
How do you apply for one?
First and foremost, it's important to apply for a home equity loan with several lenders at a time. This way, you can compare their costs and consider other factors including interest rates. Loan estimates can be obtained from many different sources, including a local creditor, an online or national broker or your preferred bank.
Lenders will look at your credit and may require a home assessment to establish firmly the fair market value of the property and the amount of your equity. It can take several weeks or more before you have any money available.
Lenders often search for and determine approval decisions on a couple of factors. You'll most likely have to have at least 25% equity in your property. You should have secure employment—at least as much as possible—and a solid income record even if you've changed jobs occasionally. You should also fulfill the TDSR guideline of 60% of the borrower's monthly income.
Ultimately, the home equity loan option can be a very powerful and useful way for you to reinforce your financial situation. On the other hand, there are also important factors to take into account, and an element of risk that needs to be considered before you proceed with this loan option, so proceed with caution.
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