How a home equity loan might save you from cash flow issue without selling your property

As we all know that while fighting against the COVID-19 pandemic and lowering the chance of getting infected, we need to abide by the government circuit breaker measure.

We are now in approaching the third weeks of the circuit break period where many stay home or work from home, children busying with their home base learning, and some were told to go on unpaid leave until further notice. I hope all have been coping well to date at home!

As the number of confirmed cases increased exponentially, our healthcare front line heroes work day and night tirelessly to take care of the infected patients. I would like to say big thanks and salute to all of you.

We must not forget all other front line comrades as well as those working in the essential services sector. It is because, with all of you, we have an orderly and safe society to keeping our economy functioning so that we still can be out to get our essential items safely. Thank you to all of you.

During the past weeks, some of my blog readers have asked me with the question about home equity loan after reading my blog post – 4 Options For Property Owners Sail Through 2020 Downturn.

As announced on 21st April 2020, the circuit breaker measure is further tightened, and the circuit breaker period will be extended by another four weeks until 1st June 2020 to further reduce the transmission of the COVID-19.

4 Options For Property Owners Sail Through 2020 Downturn.

There are always lights at the end of the tunnel to guide you out of the darkness. – Darren Ong

I understand that during this tough time, where many might face a cash flow issue due to various reasons. It may be you have lost your job, go onto unpaid leave till further notice, your business put to a halt or unable to secure rental income for their investment property due to the tightening of the circuit breaker measures.

For many homeowners in Singapore, the bulk of their net worth is tied up in their property. Sometimes this can be caught them up during difficult times. For example, a $1.2 million property owner may end up need your help with a few dollars lunch when the situation is terrible; that’s the cash flow issue.

Sometimes selling or renting out the property is not the best solution. For example, you might be caught within the Seller Stamp Duty period, or you are currently staying in the property where you cannot rent it out. Thus, your cash will be stuck in the property, and you might be thinking whether if there is a way out to monetize using the property without renting or selling.

Thus, Home equity loans, which many homeowners in Singapore are unaware of, might be helpful and save you from selling your property, which can tide you over the downturn period.

The home equity loan is sometimes referred to as cash-out refinancing or reverse mortgage, and this can overcome the issue of illiquidity.

Let see how Home equity loans work:

Please note that Home equity loan is only applicable to private property in Singapore.

You are considered taking a secured loan using your property as collateral when you apply for a home equity loan.

Case Study:

Mdm. Tan is currently facing some cash flow issues, and she decided to apply for a home equity loan to tide through the difficult time. Her property profile is as follows:

• Bought a condominium for $750,000 back in 2003
• CPF utilized with accrued interest $450,000
• Outstanding mortgage: $180,000.
• Today, the property has also appreciated its value to around $1.35 million

She can apply for a home equity loan based on the following:

Home Equity Loan = 75% of current property valuation – CPF used – outstanding loan
= ($1,350,000 x 75%) – $450,000 – $180,000
= $382,500 (approximately)

Do note that currently, the home equity loan rates are as reasonable as the mortgage loan rate. It is ranging from 1.3 to 1.7 percent per annum now.

Please treat home equity loan seriously like a mortgage. It is because a bank can foreclose your property if you fail to make your monthly repayments.

There are some pointers on home equity loan you need to take note:

1. Property type to apply for a home equity loan – as I have mentioned earlier, the home equity loan is only applicable to private property in Singapore. Please note that HDB is not applicable.

2. TDSR evaluation – As of 16 Dec 2021, the Total Debt Servicing Ratio (TDSR) will cap your monthly loan repayments to 55% of your monthly income. For home equity loans, TDSR still applies, and you must fulfill the TDSR evaluation before you are eligible to apply for a home equity loan. For TDSR monthly debt obligations, if a borrower has an existing debt obligation equal to 15 percent of his monthly income, this means that the maximum amount he can use for a property loan is 40 percent of his monthly income. Please note that monthly debt obligations include all outstanding debt such as:
   . 
   • property-related loans, this consists of the loan that you are applying for
   • renovation loans
   • credit card loans
   • vehicle loans
   • student loans
   • any other secured or unsecured loans, including revolving loans

   .
   Also, the gross monthly income refers to your monthly income before tax and excludes the CPF contributed made by the employer. Do note that rental income and variable income such as bonus, allowance, and commission need to apply a minimum haircut of 30% before counting it for your TDSR obligation.

   There are also eligible financial assets that you can include as income streams in TDSR, and it depends on how long you pledged. You may refer to the table at MAS website.

   The good news is that MAS also announced on 10th March 2017 that there is an exemption for TDSR if the loan is less than 50% of the property valuation.

2. 2. 3. Application timeline – it takes about two weeks for applications and 6-8 weeks to disburse.

2. 2. 4. Repayment Method – The monthly repayment is only by way of cash payment.

Always remember that home equity term loans monthly repayment are in cash only.

2. 2. 5. Buy another property restriction – the bank will not approve the home equity loan if you declare that you are using the money to buy another property. You should not false declare and buy another property using the home equity loan as the bank might come after you for fraud.You can freely use the disbursed sum for other purposes such as investment on other assets but not on property or setting up a business, etc.
   3. 6. Cost involved – there is a valuation fee of around $500 that you have to pay. The bank processing fee is ranging between $2,500 and $3,500. Please note that there may be extra-legal costs payable, depending on which bank you apply.
   4. 7. Loan amount matter – a home equity loan is usually more appropriate for a larger loan amount from $100,000 or above. You may check with the bank for other borrowing alternatives if the loan amount is too small, as it is not worth doing so.

As mentioned earlier that the interest rates are low for home equity loans at around 1.3 to 1.7 percent, thus it may be the way out to help you tide over the COVID-19 downturn period to ease your cash flow issue without selling your private property.

In summary 

Do remember that while this may be the way to tide over, you still need to follow the above seven pointers which are:

2. 2. 1. For private property only, HDB not applicable.
      2. TDSR evaluation applies (exempted if loan less than 50% of property value).
      3. Two weeks of application and 6-8 weeks to disburse.
      4. Only monthly cash repayment.
      5. Cannot use a home equity loan to buy another property.
      6. Cost involves a valuation fee ($500 approximately) and a processing fee ($2,500 – $3,500 approximately).
      7. For larger loan quantum is more practical.

You may drop me an email or a message if you are not sure what you can do, I may be able to help to come up with some plans or ideas for you.

I hope that this option may help you in a way out if you are facing a cash flow problem during this COVID-19 downturn without selling your property. But hopefully, you do not need to execute this option, and you can weather through this storm.