How To Get An Equity Term Loan

If you are looking for money to consolidate your debts, renovate your home, or improve business cashflow, an equity term loan can be a good option.

An equity term loan allows you to tap the value of your home equity. You can obtain the funds you need even when your assets are tied up in the property.

Just like your primary mortgage equity, equity term loans are offered at lower rates than other types of loans.

In this article, we look at how to get an equity term loan and everything you need to know before you apply for one. Stay with us as we delve into how you can tap into the equity of your property.

What Is A Term Loan Or Equity Loan?

A term loan, or equity loan, is the financing that you can get from a lender using the equity built on your home as collateral.

If your property has gained value over the years, you can use this as collateral to get a low-interest loan.

An equity term loan is commonly referred to as a second mortgage. This is because it’s another mortgage on top of your primary mortgage.

The lender will get a valuer to reassess the current property value. If it has appreciated, this will be used as collateral.

You will get a loan on the increase, on top of the existing loan. For instance, let’s say you bought a property for $850,000 and it is now worth $1,200,000. You can get a 75% equity term loan from the appreciated value minus the CPF amount you borrowed.

It’s critical to remember that the loan-to-value ratio must remain at 75%.

In the event you have a loan that is not fully paid and you used your CPF, the outstanding equity amount left after these are deducted will be used.

Let’s say you have an outstanding loan of $200,000 and you have borrowed $300,000 using your CPF. The outstanding equity amount will be as follows:

(75% x $1,200,000) – $300,000 – $200,000 = $400,000. This means you can get an equity loan of $400,000.

How To Check Your Eligibility

In Singapore, only owners of private properties can access the equity term loan. Those who own HDB flats don’t qualify.

Owners of executive condominiums can qualify after the minimum occupation period of five years.

Those with outstanding home loans can only apply for equity term loans from the same bank. For example, if you have a home loan with DBS Bank, you will need to get your equity term loan from DBS.

But if your bank does not approve the equity term loan, then you will be stuck until you complete the mortgage payments.

Factors To Consider Before Taking Out An Equity Term Loan

Before you apply for an equity term loan, there are several things you must consider. Here are the crucial considerations you must make before you apply for such a loan.

How Much Of Your Mortgage Have You Managed To Pay Off?

You can only get an equity term loan for the amount of the mortgage that is paid. Outstanding amounts will be deducted from the current equity value of the property.

What Is The Interest On Your Equity Term Loan?

Equity loans have lower interest rates compared to other loans. However, it’s prudent to check and research to find the best rate.

If you have an outstanding loan, consider the interest your current bank or lender is offering. Remember, the higher the interest rate, the higher the cost of your loan.

Those with no outstanding loans can review the various interest rates offered by lenders and choose the best one.

How Do You Intend To Pay Back The Loan?

Before you apply for an equity term loan, you need to review your finances and ensure you can repay the loan.

You must ensure the loan is paid back or else it will continue to accrue to the next generation. Eventually, the property may have to be sold to pay off the loan.

So plan how you intend to pay the loan back well in advance.

How Much Should I Borrow?

Don’t be tempted to borrow what you can’t repay. You need to borrow only what you can afford to pay back.

You must consider factors such as a decline in property value and what that means for you. In such a scenario, even selling the property may not cover the debt you owe.

Be prudent when borrowing and always consider your ability to pay.

What Is The Cost Of Getting A Home Loan?

There are some admin fees you may incur when getting an equity term loan such as legal and valuation costs. These costs depend on how much of the loan you intend to cash out.

So remember you need to pay such costs, as well as your monthly repayments.

Advantages And Disadvantages Of Taking An Equity Term Loan

An equity term loan has its advantages and disadvantages. Here are some pros and cons of taking out an equity term loan.

Advantages Of Taking Out An Equity Term Loan

Get Cash At The Lowest Rates In The Market

Equity term loans have some of the lowest interest rates. At 1-3%, these are the lowest rates you will find in the market. Business and personal loans have higher interest rates of up to 6% per annum.

It’s Easy To Get An Equity Home Loan

Equity term loans are fairly easy to get as they are secured by your property. You can get a large sum of money in a short time.

Interest On The Loan Is Tax Deductible

The interest charged on the equity term is tax deductible. This lowers your tax expenses.

Disadvantages Of Taking An Equity Term Loan

Risk Of Losing Your Home

There is a risk of losing your property if you fail to pay the loan. Hence, it’s important to make sure you can afford to pay the loan.

Don’t get an equity term loan if you intend to use the money to start a business whose chances of success are low.

Increases Your Debt

Taking up an equity term loan means you are adding more debt on top of your primary mortgage. This increases your debt burden.

If you don’t plan well, this could lead to cashflow issues and may eventually lead to default.

How Much Can You Cash Out?

The amount of money you will be able to cash out depends on the current value of the property, the outstanding mortgage, and the CPF funds you have borrowed.

Use this formula to calculate how much you are likely to cash out:

75% of the current value of your property – outstanding debt – CPF amounts you borrowed when purchasing the property = equity term loan amount you can get

In the event that your outstanding debt exceeds 75% of your current home value, you will not get the equity term loan.

The lender is guided by the regulations set by the Monetary Authority of Singapore when determining how much it can loan to you.

In addition, if you owe a huge sum of money to CPF, the amount you can cash out will also be reduced.

So the amount you can cash out will depend on the value of your property, your outstanding debt, and the amount of CPF savings you borrowed.

How Should You Use The Extra Cash?

You can use the equity term loan for various purposes. Here are some ideas:

Debt Consolidation

If you have high-interest debt, you can use an equity term loan to consolidate your debts. An equity term loan is low interest, so you can use it to clear high-interest loans.

This way, you can concentrate on paying off one loan.

This will also reduce your borrowing costs and make it easier to manage your finances. You minimise the risk of defaulting and falling into more debt.

Use The Money To Start A Business

An equity term loan is low interest and therefore ideal if you are starting a business whose success rate looks to be high.

This means you will be able to run a business and recoup the money in good time. Do your research and be sure the business cashflow you expect is realistic before you apply for the loan.

You will also need to consider the cost of applying for the loan when you are reviewing whether it’s ideal to use the equity term loan for the business.

Invest The Money And Earn More Than The Interest You Are Charged

Take out the cash and invest it in a way that will make more than the interest you will be charged. If you have an investment that will return more than 5%, then you can use an equity term loan.

Don’t rush into an investment before considering all the costs involved. Remember, there are investment costs and borrowing costs.

Before you choose where to invest the money, you have to ensure that the investment will earn more interest than you are paying for the loan.

To Tide Over Hard Times

If you have fallen on hard times, you may opt to take out an equity term loan. However, you must ensure that you can set aside enough money to make the monthly repayments even as you continue to look for a long-term solution.

Choose The Right Equity Term Loan

We hope you now understand what an equity term loan is and how much you can get. It’s important to ensure you can afford to pay back the loan to avoid losing your property.

Search for the best equity term loan deals and sign up for the one that suits your needs.

An equity term loan is typically easier to qualify for than a traditional bank loan. It can provide the funding you need to grow your business or invest.

But before you apply, make sure you understand how equity term loans work, and the terms and conditions they are offering.

Alternatively, look for affordable loans at low interest from Katong Credit. We offer quick loans to help you grow your business or invest and make the returns you have been eyeing.

How Do You Get An Equity Term Loan?