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

Home equity loans differ from home loans issued when buying a property. Equity loans are ideal when you need a large sum of money, and personal loans are not an option. The good thing is that you can still take out an equity loan even when paying an existing mortgage.

But what is equity in housing loan? How does it even work? Here is a comprehensive guide on equity in a housing loan and how to use it.

What Is Equity In Housing Loan?

Home equity is a portion of a home’s market value that the owner currently possesses. This is especially so if the property was obtained through a mortgage loan because the lending institution owns part of the home until the loan is paid in full.

As you continue paying the outstanding loan on your home, your equity continues to increase.

Equity also constitutes the appreciated value of the property since it was bought. The value of the property may fluctuate depending on the market conditions. But generally, any value above the purchase price can be used to acquire financing. For this reason, these types of loans are sometimes called mortgage equity withdrawal loans.

What Is An Home Equity Loan Or Cash-Out Refinancing?

A home equity loan or cash-out refinancing Singapore is a type of loan that uses the equity (appreciated value) of your house as collateral.

For example, if you bought your house at $1,000,000 but a few years later, it is valued at $1,200,000, you can get a loan on the new value. You get about 75% of your house value with an equity loan. This means you can get a loan amounting to $900,000.

Home Equity Loan Vs Equity Term Loan

The terms home equity loan and equity term loan are often used interchangeably. It is the same type of loan but with a few differences. A Singapore home equity loan is given to property owners who have already paid their mortgage in full, while an equity term loan is given to people who are still paying their mortgage.

If your mortgage is fully paid off, you can use the whole value of your property as collateral for your loan. On the other hand, when taking an equity term loan, you only cash out the value of the partially paid mortgage plus the appreciated value of the house.

How to Calculate a Home Equity Loan

When calculating the home equity line of credit (HELOC), there are several factors that lenders will consider.

The most important factor is the property’s market value because the higher the value, the more you can cash out in the form of a loan.

For instance, if your property has a market value of $3,000,000, an outstanding loan amount of $500,000, and a CPF of $100,000. The equity amount you can get equals (0.75 x $3 million = $2.25 million).

Then, subtract CPF and the outstanding loan amount from $2.25 million ($2.25 million – $100,000 – $500,000 = $1,650,000). The maximum equity loan such a homeowner can get is $1.65 million.

Banks subtract the Central Provident Fund (CPF) to prevent you from using all your CPF funds. If you didn’t use any of your CPF when purchasing the house, this deduction would not be made.

What Are The Interest Rates On Home Equity Loans?

Unlike most other loan types, an equity home loan attracts very low-interest rates. Here is a table that compares different loans and their average interest rates in Singapore. These rates will vary depending on the money lender you approach.

It is important to note that home equity loans attract a very low-interest rate compared to other loan types because the property acts as collateral. Banks will charge high-interest rates for unsecured loans such as personal loans.

Type Of LoanInterest Rate
Home equity loans1%+
Home loans4.25-4.5%
Renovation Loans2.98-5.8%
Personal loans3.4-3.88%
Business loans7-11%

What Is The Tenure For A Home Equity Or Term Loan?

As a general rule of thumb, banks will determine your loan tenure by subtracting your current age from 75 years. Then, subtract the total number of years you’ve serviced your home loan.

However, different banks will use different methods to determine how long you should repay your cash out refinancing Singapore. With this method, you can expect to repay your term loan Singapore in about 5 to 30 years.

Should You Get A Home Equity Loan?

You can get a home equity loan if you own a private property. If you own an executive condominium, you cannot take an equity loan until you complete the 5 years minimum occupancy period.

People who own HDB flats cannot take out a loan with the property as collateral, even if it’s fully paid.

Before considering a cash out refinance, it’s important to consider other related costs, such as valuation and legal fees.

If these fees are so huge that the loan amount reduces significantly, it may not be worth taking a loan. Remember that you also have to keep up with your monthly loan repayments.

On a positive note, if you take a loan on a commercial property in Singapore, you can get tax deductions on the interest rate.

Evaluate your needs carefully before taking an equity term loan Singapore because if you don’t manage to pay it off, you could risk foreclosure since the property is the security. Ultimately, if you’re looking for a loan with low-interest rates or quick funding, you should definitely get a home equity loan.

How To Apply For A Home Equity Loan

Applying for a home equity loan can be tedious. Basically, you need to know exactly how much money you need, although this mainly depends on the property value. Then, ensure that your credit score is good otherwise lenders will be hesitant to offer you funding and if they do, it will be at higher interest rates.

It’s crucial to do your own research to ensure that you get the best rates in the market. Thus, you need to compare quotes from different banks and private money lenders. Settle on the lender that meets your needs and hand in your financial records for approval.

Wrap Up: Make use of Equity in a Housing Loan

Since property appreciates fast in Singapore, private property owners can take advantage of the equity in their houses to acquire loans.

With the house as security, term loans attract very low-interest rates compared to personal loans. The good thing is that the banks don’t question or follow up on how you use your home equity loan.

Since the process of acquiring a housing loan can be tedious, it’s important to consult a financial advisor.

Horison Credit is a licensed money lender in Singapore that can lend you short-term or long-term loans.

Besides that, we will also offer guidance regarding the maximum amounts you can cash in on your housing equity.

Contact Horison Credit today for all your housing loans.


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