Refinancing And Equity Loan

[Butoot 0]

My wife is thinking of refinancing our house and taking an Equity loan to build an attic.

Could anyone advise on the pros and cons of an Equity Loan? My colleague says if the value of my property were to plunge because of any bubble breaking, the bank can demand the return of the equity loan suddenly.

Also, how long would such a loan take, ie from the day I apply to the day I receive the cheque, how long is this period? A week, a fortnight, a month or more?

Thanks!

[Pufferfish 0]

My wife is thinking of refinancing our house and taking an Equity loan to build an attic.

Could anyone advise on the pros and cons of an Equity Loan? My colleague says if the value of my property were to plunge because of any bubble breaking, the bank can demand the return of the equity loan suddenly.

Also, how long would such a loan take, ie from the day I apply to the day I receive the cheque, how long is this period? A week, a fortnight, a month or more?

Thanks!

Hi Butoot,

Equity loan is also commonly known as "cash out" and "term loan" etc.

It is only granted against the backdrop of appreciating property value.

Assuming if you have bought your property few years ago at $1m with a $800k loan (80% LTV. Now assuming that the pty has appreciated to $1.4mil, you can apply for an equity loan and the estimated amount will be:

70% to 80% of $1.4mil (depending on banks)

less outstanding loan

less CPF usage with accrued interest.

No big disadvantage for equity loan, as it can still be subject to same terms and rates as your housing loan. However, you should note that you cant use CPF to pay for monthly installment for equity loan.

What your colleague mentioned is known as "margin call" in lending context. From my experience, banks normally dont come after you should your pty plummet in value if you are a good pay master and your loan size is not extremely big ($7 to 8mil that kind) that warrants special attention from the bank. The banks dont have so much time to scrutinize all their loans lah..

Once you have signed on the Letter of Offer from the new bank, your lawyer will serve a redemption notice to your existing financer and usually the new bank will take over the loan 3 months later. Thereafter, you have to wait for another 2 weeks before the new bank disburses the equity loan into your designated account, as your lawyer needs to to do the necessary "stamping" on the legal mortgage docs. So it is normally about 12+2 weeks before you see the cash in your account. However, the process cant be shorten to 6+2 weeks if you pay interest-in-lieu to your existing bank.

[kliee11 0]

Hi Butoot,

Equity loan is also commonly known as "cash out" and "term loan" etc.

It is only granted against the backdrop of appreciating property value.

Assuming if you have bought your property few years ago at $1m with a $800k loan (80% LTV. Now assuming that the pty has appreciated to $1.4mil, you can apply for an equity loan and the estimated amount will be:

70% to 80% of $1.4mil (depending on banks)

less outstanding loan

less CPF usage with accrued interest.

No big disadvantage for equity loan, as it can still be subject to same terms and rates as your housing loan. However, you should note that you cant use CPF to pay for monthly installment for equity loan.

What your colleague mentioned is known as "margin call" in lending context. From my experience, banks normally dont come after you should your pty plummet in value if you are a good pay master and your loan size is not extremely big ($7 to 8mil that kind) that warrants special attention from the bank. The banks dont have so much time to scrutinize all their loans lah..

Once you have signed on the Letter of Offer from the new bank, your lawyer will serve a redemption notice to your existing financer and usually the new bank will take over the loan 3 months later. Thereafter, you have to wait for another 2 weeks before the new bank disburses the equity loan into your designated account, as your lawyer needs to to do the necessary "stamping" on the legal mortgage docs. So it is normally about 12+2 weeks before you see the cash in your account. However, the process cant be shorten to 6+2 weeks if you pay interest-in-lieu to your existing bank.

Alternatively, just ask your current bank to do a cash out, don't even need to refinance out. Hence, you save legal fees and less hassle. The process is alot quicker too, probably can get your money within a month from signing the LO.

No big disadvantage in getting the Equity loan besides paying cash payment, and it's the cheapest form of financing!

[Butoot 0]

Alternatively, just ask your current bank to do a cash out, don't even need to refinance out. Hence, you save legal fees and less hassle. The process is alot quicker too, probably can get your money within a month from signing the LO.

No big disadvantage in getting the Equity loan besides paying cash payment, and it's the cheapest form of financing!

Thank you very very much Pufferfish and Kliee11 for your kind advice. Much appreciated.

I have learnt quite a lot from your replies. I have just contacted two banks with regard to this. One is my current bank and the other is a foreign bank. I was told that foreign banks can give better interest rates but they are also usually the first to ask you to top up if the value of the house drops! Today's news reported that Minister Khaw say prices of properties will fall in 2013 and interest rates will go up. This is very scary and is giving me second thoughts on whether to take the equity loan.

Will banks still give out Term Loans if the lender's credit situation is lousy as reported by the CBS? I wonder if the bank will give weightage to this or to the value of the house itself, or to both?

Been talking to a few friends about Term Loans and I learnt of this one guy whose credit is real bad - all the Lines of Credits and credit cards that he could get he got and all maxed out and always late payments. His CBS statement was real bad and he was turned down now whenever he tried to apply for any new card or Line of Credit. However, because he stays in a condo and its value had gone up, he was able to get a Term Loan of about $200K and he paid off all his debts and now only services the Term Loan only, which is one fifth of what he had to pay every month. So now people see this Term Loan thing as a good way out of debts. I learnt some people use such loans to invest in stocks and shares, properties and other things.

Any comments? Thanks.

Edited June 10, 2011 by Butoot

[Pufferfish 0]

Thank you very very much Pufferfish and Kliee11 for your kind advice. Much appreciated.

I have learnt quite a lot from your replies. I have just contacted two banks with regard to this. One is my current bank and the other is a foreign bank. I was told that foreign banks can give better interest rates but they are also usually the first to ask you to top up if the value of the house drops! Today's news reported that Minister Khaw say prices of properties will fall in 2013 and interest rates will go up. This is very scary and is giving me second thoughts on whether to take the equity loan.

Will banks still give out Term Loans if the lender's credit situation is lousy as reported by the CBS? I wonder if the bank will give weightage to this or to the value of the house itself, or to both?

Been talking to a few friends about Term Loans and I learnt of this one guy whose credit is real bad - all the Lines of Credits and credit cards that he could get he got and all maxed out and always late payments. His CBS statement was real bad and he was turned down now whenever he tried to apply for any new card or Line of Credit. However, because he stays in a condo and its value had gone up, he was able to get a Term Loan of about $200K and he paid off all his debts and now only services the Term Loan only, which is one fifth of what he had to pay every month. So now people see this Term Loan thing as a good way out of debts. I learnt some people use such loans to invest in stocks and shares, properties and other things.

Any comments? Thanks.

Hi,

Like what Kliee11 mentioned, getting a term loan from your existing bank is the fastest route to get the funds but do bear in mind the following that your bank might not be the one offering:

a) the most competitive rates

b) the highest indicative valuation (depending on how much you want to cash out). Valuation is a very subjective exercise and the amount can differ quite a bit from bank to bank.

c) the highest loan-to-value (LTV) ratio, as such ratio will affect how much you can cash out.

Also, legal subsidy is not provided for should you apply for a cash out from your existing bank.

Back to your questions, its not true that foreign banks will always offer the lowest rates. Conversely, the logic should be that local banks should be the one being able to do so in view of their relatively large deposit base.

Having said that, I feel that no bank can afford to be a "price leader" all year round, always offering loan packages with the thinnest profit margins. Its all seasonal. There might be times when the management wants to boost their loan figures and if their budget allows them to do so, they will come up with those "cut throat" packages for a short period of time. So it pays to ask around a few banks before starting the loan application.

For someone with bad credit history, it is still possible for him to get the term loan/ cash out from the bank.

Assuming A and B are both the owners (aka mortgagors) of the property, under normal cirumstances, both A and B will have to be the borrower. However, for some banks, B can apply to be the sole borrower (provided his income is sufficient) if A is the one with bad credit history. In assessing the application, the bank will only check the credit bureau records of A and B will not appear under the radar. Unfortunately, there are very few banks in Singapore which are willing to process the loans on such basis (but there still are)...

Hope the above clarifies.

[Butoot 0]

Thanks again Pufferfish for your clarification and advice. This Term Loan thingy is new to me and I think it is good because it allows property owners whose property has appreciated in value to realise that value without having to sell the house. I was told that this is one of the secrets taught in seminars that claimed to teach people how to make more money/buy more properties using their one property. Not sure whether I should get a term loan now and wait for the coming property crash in 2013 to make a killing then! Haha.

[Butoot 0]

Hi

Is it true that an Equity Loan cannot be used to buy a property? I learnt from my colleague that this is a ruling from the Monetary Authority of Singapore. Is this something new or it has been so for a long time? I have heard of people who used their Equity Loan to invest in properties and land.

Thanks.

[blue_skies 3]

I got an equity loan about 2 yrs back and used it to finance a property purchase. No problems encountered. It's called Home Equity Loan (from UOB) and it's given out as a term loan. Maybe you can check with the banks to see whether there are any changes in the regulation, but there are none as far as I am aware.

[Butoot 0]

I got an equity loan about 2 yrs back and used it to finance a property purchase. No problems encountered. It's called Home Equity Loan (from UOB) and it's given out as a term loan. Maybe you can check with the banks to see whether there are any changes in the regulation, but there are none as far as I am aware.

I think the government is tightening the property market basically by making it more difficult for people to freely take loans to buy more properties. I was told by a friend who works in the bank that the MAS does not allow the use of equity loans to buy property now. You are lucky.

I heard that MAS has issued an instruction to the banks that all equity loans are limited to only 60% of the valuation of the property. I wonder what other measures will be imposed to dampen the property market!

Edited July 18, 2011 by Butoot

[Butoot 0]

What I heard is true. It is now official. From 27 July 11, banks will only grant you a 60% LTV if you want to get a term or equity loan (also known as cash out). This 20% makes a big difference to the final amount you can get after deducting the existing loan balance and the cpf plus accrued interest used in purchasing your property.

[kalimantan 6]

Dear Butoot

Can you give me an eg to clarify the statement : This 20% makes a big difference to the final amount you can get after deducting the existing loan balance and the cpf plus accrued interest used in purchasing your property

I know 2nd property onwards need to come up with 40% cold hard cash. Can you discuss more on that 20% above ? For discussion purpose, kindly use $1m property as an example.

Thanks

[Butoot 0]

Dear Butoot

Can you give me an eg to clarify the statement : This 20% makes a big difference to the final amount you can get after deducting the existing loan balance and the cpf plus accrued interest used in purchasing your property

Thanks

Dear Kalimantan

I am actually also quite new to this but let me try to give a very simple example using, as you suggested, a $1M property. Here goes:

Your current property is valued at $1 million.

So 60% is $600,000

Let's say you still owe the bank $200,000 and you have used up $300,000 of your CPF plus accrued interest.

With the new policy now, if you want to get a Term Loan, the bank will give you only $600,000 minus $200,000 you still owe and minus the $300,000. You get to borrow only $100,000.

Under the old policy where the bank could lend up to 80% LTV, you will be able to borrow $800,000 minus $200,000 minus $300,000 which is $300,000.

A difference of $200,000!!!

We can do a lot of things with $200,000!

Edited August 4, 2011 by Butoot

[Micko07 0]

Refinancing And Equity Loan

[Pufferfish 0]

Please also do take note that taking a term loan looks very attractive now because interest rates are low.

Be prepared if interest rates were to increase one day!

And for margin call, if you really kenna margin call, then the whole Singapore "Ho Seh Liao"!

just my thoughts!

Jon

Hi there,

Under the MxS guidelines, the purpose of equity loan can be used for anything except for the purchase of another property. That is the "By right" rule. However, "by left", you can state that the purpose of your equity loan is to buy car / stock investments during the application. Once the loan is approved and disbursed, no one really cares how you are going to use the money. Those not so financially savvy one would use it on cars, holidays, MBS/RWS etc..

As for the new ruling on the 60% LTV for equity loan, you can still get up to 80% LTV for equity loan if you only have one outstanding housing loan at the point of application. If I am now staying in a condo and i only have such a loan, the bank is still able to grant a 80% LTV.

[Butoot 0]

Hi there,

Under the MxS guidelines, the purpose of equity loan can be used for anything except for the purchase of another property. That is the "By right" rule. However, "by left", you can state that the purpose of your equity loan is to buy car / stock investments during the application. Once the loan is approved and disbursed, no one really cares how you are going to use the money. Those not so financially savvy one would use it on cars, holidays, MBS/RWS etc..

As for the new ruling on the 60% LTV for equity loan, you can still get up to 80% LTV for equity loan if you only have one outstanding housing loan at the point of application. If I am now staying in a condo and i only have such a loan, the bank is still able to grant a 80% LTV.

Hi Pufferfish

Thanks for your reply. I learnt it from two different mortgage brokers who should know what they are talking about. I also read from Dennis Ng's website and he mentioned the same thing. As long as you have one or more outstanding loan, you only get 60%. If you have totally no housing loan, then it is 80%.

Please see this:

http://www.masteryourfinance.com/forum/phpBB2/viewtopic.php?t=2093

Edited August 16, 2011 by Butoot