What Is Equity In A Housing Loan And How Can You Make Use Of It?

Written by Shannon Wong on March 28, 2023

Housing in Singapore costs a lot of money. Many people own houses that are over $800/$1m in value. The problem with owning a home that costs that much is that your money is pretty much locked in asset value. 

This means they don’t have access to that money to settle bills or an urgent financial need. But with equity housing loans, people can cash in on their property’s value without losing their home. How does it work? Read on to find out what is equity in housing loan.

What Is Equity In Housing Loan?

Equity in housing loan refers to the portion of a property’s value that the homeowner owns outright, or has paid off. In simpler terms, equity in a housing loan means how much of your home you own. It’s the difference between the value of your home and the amount you still owe on your mortgage.

So if your home is worth $300,000 and you owe $200,000 on your housing loan, you have $100,000 in equity. You can also have full equity. Having full equity means that you own 100% of your property. This means you’ve fully paid off your housing loan and have complete control over the property. Equity can be used as a source of funds if you need to borrow money. 

What Is An Home Equity Loan Or Cash Out Refinancing?

Now that you know what is equity in housing loan, it’s important to understand what an equity home loan is. A home equity loan or cash out refinancing  is a type of loan that allows homeowners to use their property as collateral to secure a loan. In other words, it’s a loan that is taken out against the value of the property.

The property serves as collateral for the loan, and the lender uses the property’s equity as security for the loan. If you default on the loan, the lender can foreclose on the property and recoup their losses.

This type of loan is like taking out a second mortgage. Hence, it is called a reverse mortgage. 

Cash out refinancing in Singapore is commonly used by homeowners to finance a variety of purposes. This includes home renovations, debt consolidation, financing a large purchase, or capital for a new business. 

With this loan, you can borrow up to 75% of your property’s value. And since your property serves as the collateral, the interest rates are quite low. 

Home Equity Loan Vs Equity Term Loan

Home equity loan and equity term loan in Singapore are pretty similar. Both loans involve using the value of your property as collateral to take a loan. 

However, the major difference between the two is that home equity loans allow you to use your home as collateral if it’s fully paid for. But with an equity term loan, you can access the equity you have built up in your home. This means with an equity term loan in Singapore, you can take a loan using your house as collateral when it hasn’t been fully paid for.

Should You Get A Home Equity Loan?

Taking a home equity loan has its merits and demerits. While it’s a great opportunity to have access to a large sum of money, there are life-altering risks involved. So, before deciding if you should get a home equity loan, let’s look at the advantages and disadvantages

Advantages Of A Home Equity Loan

Here are the benefits of a home equity loan:

  • Debt Consolidation

A home equity loan can be used to consolidate high-interest debt into a single, lower-interest loan. Let’s say you owe $200,000 in personal loans and credit card bills. With such a huge debt, you may not be able to pay it off with your salary alone. But assuming you have a house that’s worth $800,000, you can easily take out a home equity loan of $200,000 to consolidate your debt. This way, you only owe a single loan instead of servicing multiple loans from different financial institutions. This potentially saves money on interest and makes it easier to manage monthly payments.

  • Home Renovations

Are you looking for a large sum of money to make major renovations in your home? Home equity loans can provide funds for home renovations, upgrades, or improvements. This allows you to add value to their property and improve your quality of life. 

  • Large Purchases

Equity home loans can be used to finance a large purchase. This includes a new car, a vacation, or your child’s education. This allows you to fund pressing needs and enjoy a better quality of life without large savings to dip your hands into. 

  • Access To Funds

A home equity loan can provide access to a large amount of funds that may not be available through other types of loans like personal loans. For example, if your property is worth $1,000,000, you can borrow up to 70% of the value which is about $700,000. Getting access to this amount of money via other types of loans will be quite difficult. 

  • Lower Interest Rates

Another reason why Singapore home equity loans are a good idea is the low interest rates. Home equity loans often have lower interest rates than other types of loans like personal loans or credit cards. This makes it more affordable than other types of loans. 

Disadvantages Of A Home Equity Loan

Here are the disadvantages of home equity loans:

  • Risk To Property

The major disadvantage of taking a home equity loan in Singapore is the risk to your property. This type of loan can put a homeowner’s property at risk. Since the property serves as collateral for the loan, the lender may foreclose on the property if you’re unable to make loan payments. While the possibility of gaining access to a large sum of money might seem too good to be true, the thought of losing the roof over your head is also a cause for concern. 

  • Potential For Misuse

The accessibility of funds through a mortgage equity withdrawal loan may tempt homeowners to misuse the funds. Some homeowners may pay for expensive holidays, buy costly cars or fund other purchases that aren’t exactly a necessity. This misuse of money could lead to additional debt and financial stress.

With all that in mind, you need to weigh the pros and cons and decide if it’s a risk worth taking. If you’re certain that the reason you need such a large loan is a worthy risk, then you should go for it.  

More on this topic:

How To Apply For A Home Equity Loan 

You can follow the steps below to apply for a cash out refinance in Singapore:

  • Determine eligibility: The first step is to determine your eligibility for a home equity loan. This means you have to own private property in Singapore. Also need to have paid for the property in full. 
  • Research lenders: As a homeowner, you’ll need to research different lenders, including banks and credit unions to compare interest rates, repayment terms, and fees. This allows you to choose the most favourable loan terms. 
  • Gather necessary documents: You should also gather the necessary documents, including proof of income, your property valuation, and information about your credit history.
  • Submit a loan application: The next step is to submit a loan application to your chosen lender, providing the necessary documents and information.
  • Review and sign loan agreement: When your loan application is granted, you’ll need to review the loan agreement carefully. Sign in if you agree to the terms and conditions.
  • Receive loan funds: Once the loan agreement has been signed, you should receive the loan funds, which can then be used for the desired purpose.

You Can Use a Home Equity Loan To Finance Large Purchases

So what is equity in housing loan? Home equity loans or cash out refinance allow you to borrow money on the value of your property. You can use this type of loan to make large purchases like home renovation, cars, or even pay for your child’s education. 

Are you looking for loans with affordable terms and quick approval? 1AP Capital understands that you need access to fast and affordable loans to settle bills quickly. Hence, we provide you with on-the-spot loan approvals so that they can settle their bills as soon as possible. You can apply for a loan today and get the cash you need instantly. 

Frequently Asked Questions 

How Long Does It Take To Get A Home Equity Loan Approved In Singapore?

The time it takes to get a home equity loan approved in Singapore can vary depending on several factors including the financial institution. However, it typically takes two months to get your equity loan approved. 

Why Are Equity Loans Interest Rates Low? 

Equity loans typically have low interest rates because they are secured by your property. 

Can I Repay My Home Equity Loan With CPF? 

No, you cannot use your Central Provident Fund (CPF) savings to repay a home equity loan in Singapore.

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