A property equity loan, also known as a term loan or cash-out refinancing, can be a strong financial tool if used wisely.
Here’s what you can do with it, plus key considerations:
What is a Property Equity Loan
Basic Requirements
A property equity loan lets you unlock cash from the value of your property without selling it.
- You borrow against the difference between your property’s current market value and your outstanding home loan, inclusive of CPF.
- In Singapore, banks typically allow borrowers to borrow up to 75% of the property’s value. This is called the LTV cap. They will subtract any existing loans and CPF usage if you have them.
Common Uses for Property Equity Loans
1. Debt Consolidation
- Pay off higher-interest debt (credit cards, personal loans) at a much lower mortgage interest rate.
- Can save significantly on interest if you have substantial debts on high interest rates.
2. Home Renovation / Upgrading
- Fund major renovations, extensions, or additions to your property.
- Spreads cost over a long tenure at a low interest rate.
3. Investment
- Commercial/Overseas Property Investment: Use the cash to fund the downpayment for another commercial/overseas property purchase. Note that you cannot use an equity term loan to finance the down payment for residential property.
- Business Funding: Entrepreneurs sometimes use it as working capital for their business.
- Financial Investments: Some invest in stocks, bonds, or other opportunities, though this carries risk if investments underperform. Some low-risk options might offer a higher return than the Singapore mortgage rate. You may wish to take extra considerations when considering a property equity loan for personal investment use.
4. Education & Major Life Expenses
- Pay for overseas education, weddings, or medical expenses cost-effectively compared to personal loans.
5. Emergency Liquidity
Provides a cash buffer without liquidating other assets.
⚠️ Key Considerations & Risks
Interest Rate Risk
- Lenders usually peg property equity loans to SORA or the bank’s fixed/floating rates. If rates rise, repayments may increase.
Loan Tenure & Commitment
- You are effectively increasing your mortgage debt — stretching the repayment period or increasing the monthly commitment.
TDSR (Total Debt Servicing Ratio)
- Your total debt obligations cannot exceed 55% of your monthly gross income (as per MAS rules).
- Exemption of total debt servicing ratio is possible within certain acceptable perimeters with the banks.
- This limits how much equity you can actually cash out.
Opportunity Cost
- If property prices fall, your outstanding loan may be closer to your property value (reducing future flexibility).
For HDB Owners
- HDB does not allow equity term loans. Only private property owners can do this.
Best Practices
- Use for productive purposes: Funding a commercial/overseas property investment, education, or consolidating expensive debt —not just consumption.
- Leave a safety margin: Avoid maxing out your LTV so you have a buffer if interest rates or life circumstances change.
- Compare packages: Different banks offer varying spreads and lock-in periods.
Would you like assistance in finding the best property equity term loan? 😊