Home Equity Loans in Singapore | Factors to Consider for Equity Loan

Home Loans | Loans
by Priyadarshini 23 December 2022

An equity loan allows you to borrow against the equity in your home, but improper use can have disastrous unforeseen consequences. Here’s what you should know about equity loans and what you should think about before acquiring one. In this blog, we tell you about home equity loans in Singapore.

Home Equity Loans in Singapore

What exactly is an equity loan, and who is it intended for?

You already know the answer: yes, you can, and the best method to do it is with a home equity loan. An equity loan (sometimes known as a reverse mortgage) is a type of secured loan that uses your home as collateral. It enables you to access the value of your home in order to satisfy your financial demands without having to sell or lose your property.

In order to obtain the loan, you must pledge your property to the bank. Equity loans differ from unsecured loans, such as personal loans, because your property is used as security. For one thing, the amount you can borrow is significantly more in comparison, often approaching the value of your home. However, this is lowered by the amount still owed on your mortgage, if any. For another, the loan has a much longer-term, up to 30 years in some situations. For a third distinction, equity loans offer substantially lower interest rates – you’re unlikely to flee and abandon your home.

Who are Home Equity Loans For?

To begin, you must possess a residential property. This might be paid in full or in part. Furthermore, the property must be a private development; equity loans cannot be obtained on HDB flats. (However, there is the Lease Buyback Scheme, which may be beneficial.) You may be considering applying for an equity loan now that you understand what it is and what the requirements are. Consider the following before proceeding.

How much of your mortgage have you already paid off?

One thing to keep in mind is that an equity loan is secured by the equity you own in your home. This implies you can only borrow as much as you have paid on your mortgage. Here’s an illustration.

Assume you own a shoebox condo studio worth S$1 million and have paid off S$200,000 of your mortgage. If you try to take out an equity loan, you will only be able to borrow up to S$200,000 rather than the full S$1 million.

What is the rate of interest on your equity loan?

Although equity loans have lower interest rates, you will still be paying a significant amount in interest due to the comparatively large amount borrowed. As a result, every little amount helps. When looking for an equity loan, make sure you thoroughly analyze the interest rates on offer. Choosing the first one you see could cost you thousands of dollars more in the long run.

How do you intend to repay the loan? – Home Equity Loans in Singapore

This is especially critical if you plan to fund your retirement with an equity loan. Understand that even if you are borrowing against your house, which is an asset you own, an equity loan must still be repaid. If you don’t, your debt will be passed down to the next generation, which you certainly don’t want to do to your family, right?

As a result, you should have a clear plan for repaying your equity loan. Yes, you may easily sell your property to pay off your debt, or you can leave the land to your descendants to pay off the loan.

What amount of money should you borrow?

It may be tempting to ‘cash out’ your S$2 million landed property and spend your golden years travelling the world, but you should be more conservative. The first is the interest on your equity loan, which effectively decreases the amount you can borrow.

Second, if the value of your property falls, selling it may not be enough to fully repay your debt. If this occurs, you will be saddled with debt that you may not be able to repay. As a result, rather than viewing equity loans as a golden ticket to an unrestricted lifestyle, it is prudent to consider the value of your property as an additional source of income. Try to borrow only what you need, rather than what you want.

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