How Do You Get An Equity Term Loan?

Written by 1AP Credit on October 28, 2022

Are you a homeowner who needs a loan with rather convenient terms?

If so, an equity term loan in Singapore could be the answer to your prayers.

This loan offers competitive interest rates and flexible repayment terms, making it a popular choice among homeowners.

Plus, it allows you to borrow a large sum of money and keep your monthly payments as low as possible.

This is why an equity term loan might be the best choice for you when you’re looking for a low-interest loan.

But how do you get an equity term loan? Keep reading to find out.

What Is A Term Loan Or Equity Loan?

Sometimes also known as a home equity loan or cash-out refinancing, a term equity loan is a kind of home mortgage loan.

It lets homeowners borrow large sums of money in exchange for the equity in their homes.

In other words, homeowners use their equity in the home as collateral and borrow a sizeable amount of money. Since the loan is secured, you’d usually get better interest rates than a personal loan.

But how exactly does this loan work?

Such a loan basically lets you take advantage of an increase in your property’s market value.

Consider the following example:

Let’s say you bought a property worth $700,000 in 2020. Today, the same property is priced at $1 million.

A home equity loan or term loan would let you borrow around 70-80% of the property’s current price, minus mortgage loan amounts or any CPF used.

This means you can take an equity term loan out of your property even if you haven’t paid it off in full.

In other words, you are borrowing money against the paid portion of your property.

How To Check Your Eligibility

The eligibility requirements for home equity loans in Singapore are pretty straightforward.

You can only get a home equity or term loan against a private property you own.

If you have a HDB flat, you might have to look for other ways of financing – cash-out refinancing will simply not work for you.

But you are eligible for taking out an equity term loan if you own an executive condominium. However, you will have to wait till your five-year Minimum Occupation Period (MOP) is over.

How Much Can You Cash Out?

Banks usually allow you to cash out 70-80% of your property’s current market value. However, the following two factors also impact your total loan amount:

  • Outstanding loan on your property (if any)
  • CPF funds used to buy the property

The bank will determine your property’s market value by using the following equation to calculate how much you can cash out:

XYZ = Your Equity Loan Amount

Where:

X = Your property’s market price

Y = Your due home loan

Z = CPF funds used to pay off the property

Plus, you need to know two important things.

First, the bank will determine your property’s valuation. This is where most borrowers might feel the need to employ a third-party appraiser.

Secondly, you will also incur some costs, so make sure you have factored in those as well. Remember that banks can charge a processing fee that ranges from $1,500 to $4,000.

Now that you know how much you will get, let’s see what you can really do with it.

How Should You Use The Extra Cash?

Generally, there are no restrictions when it comes to spending the loan amount.

You can use it for anything – from a home renovation, to education funding, to medical emergencies, wedding expenses, and investment opportunities.

Of course, the bank will still check your creditworthiness and income documents to ensure you can repay the loan amount.

But once you get approved, what you do with the money is really up to you.

While it may seem like a good idea to access the equity in your home, you should only do so if you’re sure you can afford the repayments.

Let’s look at some things to consider before you decide to take out an equity term loan.

Factors To Consider

Before you start making plans to apply for an equity loan, consider the following:

  1. Are You Eligible?

You must own a private property in Singapore to qualify for an equity term loan. If you own a HDB flat, you will not be able to use this method of refinancing.

Or you may also get an equity term loan against your executive condominium. But make sure the five-year MOP has been completed.

  1. How Much Can You Borrow?

As mentioned, you can get a loan that is equal to 70-80% of your property’s current valuation.

If the property isn’t completely paid for, the loan amount will be calculated by subtracting the outstanding mortgage payment, and CPF used (if any) from the property’s market price.

  1. What Will It Cost You?

Remember that you may not get the complete loan amount.

Therefore, you must understand the costs associated with it. The bank will charge you a fee, which will cover legal documentation, property valuation, and other standard operations.

The overall processing fee varies from one bank to another but usually starts at $1,500, and can go as high as $4,000.

  1. Where Will You Use It?

The choice is really yours.

You may choose to spend the money on investments, business, personal expenses, medical emergencies, weddings, or any other purpose. The bank doesn’t have any say in the matter.

However, you do need to spend it wisely, or you may end up in a difficult financial situation.

  1. Can You Repay?

This is the most critical factor to consider before taking out an equity term loan.

You will be required to make regular monthly repayments, and if you default on these payments, you will risk the roof over your head – your home.

So ensure you understand the legal and financial consequences of taking out an equity term loan before signing on the dotted line.

It goes without saying that you should only take a loan when you know you can pay it back.

If you’re still not sure if an equity term loan is right for you, let’s walk you through some pros and cons of an equity term loan.

Pros And Cons

Let’s uncover some upsides and downsides of an equity term loan.

Pros

  • Large sum of money: You can get a large sum of money – up to 80% of your property’s value. This can come in handy if you need to make a big purchase or want to consolidate your debts.
  • Low interest rate: The interest rate is usually lower than that of personal loans and credit cards. This makes it easier to repay the loan amount.
  • Flexible use: You can use the loan amount for any purpose. There are no restrictions on how you spend the money.
  • Long repayment period: You get more than sufficient time to repay your loan.

The typical loan tenure for a home equity loan is calculated by subtracting your age from 75. If you’re already servicing a home loan, subtract the number of serviced years from 75 too.

So if you’re currently 40 and have serviced a home loan for five years, your home equity loan tenure will be: 75 – 40 – 5 = 30 years.

30 years is a more-than-reasonable length of time to repay your loan.

  • Can be used to refinance existing loans: You can use the loan to refinance your other loans, such as your home loan, car loan, and personal loans. This will also help lower your monthly repayments if you decide to prepay other loans.

Cons

  • Property as collateral: By far the biggest downside of an equity term loan is that your property is used as collateral. If you default on your loan repayments, the bank can exercise its legal right to seize your property.
  • You need a private property: Not everyone can apply for an equity term loan. You need to own a private property to be eligible for the loan. HDB flat owners can’t cash out money out of their equity.
  • Long processing time: Equity term loans have lengthy processing and approval times. Some banks take up to two months to approve your loan.

This may extend up to four months if you already have a home loan with the bank.

Always Borrow Responsibly

An equity term loan is a great way to get your hands on a large sum of money.

However, you need to be sure that you can repay the loan amount before taking one out. Otherwise, you could risk losing your home.

You might need expert financial advice if you’re unsure about your loan options.

Our team of experienced loan advisors at 1AP Capital can help you compare different loan products to find one that suits your needs.

Reach out today for expert, helpful advice, or apply for a loan now.

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