Why You Should Restructure Your Property Loan
In Singapore, most of you will take a property mortgage loan for your property purchase. Be it HDB flats or private property.
Why should you restructure your property housing loan now and then?
There are a few possibilities.
1. You want to reduce your monthly instalment.
2. You want to save some interest.
3. You want to cash out for some emergency usage.
4. You want to maximise your investment.
Reducing your monthly instalment.
Why do you want to reduce your instalment?
1. You have extra funds.
Simple, make a partial lump-sum payment, reduce the remaining principal of the loan amount, your monthly instalment will reduce quite significantly.
2. Your incomes reduce
Nobody will know when you will face financial difficulty, pay cut etc….
If you do, the following may be a good tip for you to tide through your difficult times.
Let’s take look at the example below.
John has a private condominium, he has an outstanding loan of S$491K and a balance of 10 years to pay off his loan. He is now 40 years old. His income has reduced from S$9,000 to S$7,500 monthly. Currently, he is serving an instalment of S$4,552 monthly at a fixed interest of 2% per annum. He needs to reduce his monthly instalment.
Let’s assume the interest rate remains the same, John needs to extend his tenure of the loan to reduce his monthly instalment.
John is 40 years old, he can extend the tenure of his loan till his age of 75 years old of a maximum loan tenure of 30 years.
He chose to refinance for a 20 years loan tenure.
Existing monthly instalment: S$4,552.
Refinance on outstanding loan: S$491,000, Interest rate: 2%
The new monthly instalment will be reduced to S$2,484.
The reduces of S$2,068 (S$4,552 – S$2,484) give a great relieve for John
The set back is John will have to pay more interest to his property due to the extension of the loan tenure.
Savings on interest when the interest rate reduced.
The bank interest rates change according to the markets sentiments. Singapore bank interest rates track the US.
So if the interest rate reduces, you are strongly recommended to refinance your property to a lower interest rate, and this will save you a sum of interest.
The following scenarios will give you a clearer picture.
Jane is 45 years old and she has a 5 room HDB flat in Kim Tian Road, taking a HDB loan with an outstanding loan S$470K, with balance tenure of 20 years. She has a monthly income of S$9,000.
She is now servicing her loan at a monthly instalment of S$2,522 at an interest rate of 2.6%, the commercial bank market interest reduces to around 1.7%.
Jane decides to refinance her mortgage loan at a lower interest rate with the remaining tenure of 20 years.
Refinance mortgage loan: S$470,000
Interest rate: 1.7%
New monthly instalment amount: S$2,311
She saves S$211 ( S$2,522 – S$2,311) monthly with the new interest rate.
For 20 years, she will save up to S$50,604 if the rate remains at 1.7%
Hey, youmay want to tell me that you can pay for the instalment but you need some immediate cash to settle some emergency needs.
Is there any solution to it?
Yes, of course, you may have heard about Home Equity Loan?
What is Home Equity Loan?
Home Equity loan, a term loan, using the equity of property as collateral.
When your property increase in value over time, you will be able to borrow money on the difference between your existing loan and the market value at a low-interest rate.
How does the Home Equity Loan go about?
The bank will re-assess the value of your property at the current market value.
If there is an appreciation in your property against the value at the time you bought it, you will be able to loan a portion of the increased value on top of your existing mortgage loan.
Even if have an existing loan, you can also do so. Actually, you are borrowing the amount that you have already paid. And this we called it a cash-out term loan
In Singapore, the Home Equity Loan is only applicable to private homeowners. If you only have a property and is an HDB flat, you’re not eligible for this Equity Loan.
The equity loan can only service in cash, CPF is not allowed.
How much can you draw out from an Home Equity Loan?
Theoretically, the maximum amount you can borrow with a home equity loan is 75% of your home value or the formula below, whichever is lesser:
75% of Property Value – Outstanding Loan Amount – CPF Monies Used = Term Loan borrowing amount
By not allowing you to borrow more than 75% of your property value, banks have a buffer against your property value dropping below the amount they loaned you.
For the CPF monies portion, banks typically also factor in your CPF usage (with accrued interest). This will bring your total eligible loan amount lower.
The maximum age you can stretch your home equity loan is up to the borrower’s age of 75, or maximum tenure of not more than 35 years whichever is shorter.
If you’re borrowing more than 50% of your property’s value, Total Debt Servicing Ratio (TDSR) would apply
Let me show you how you can go about doing it based on these 2 examples.
Maximum your investment
Ali is preparing to start up a new business, he needs some start-up capital to do so. Since he has a property that has already appreciated in value over the years, he decided to cash out the difference for his needs in his new business.
Equity Terms loan is what he is looking at.
So what will be the maximum amount he can borrow from this Equity Terms loan.
Ali is 45 years old, has a monthly income of S$8,000. He bought a freehold 2 bedroom condominium 20 years ago at the price of S$650,000. He has a remaining loan tenure of 10 years, and an outstanding loan of S$210,922, monthly instalment of S$1,975
The market value of the unit in the current market is S$1.2M. The difference between the current market value of S$1.2M and the outstanding loan of S$210,922 is S$989,078.
Can he borrow the full amount of S$989,078 which is the difference?
The answer is NO.
The authority does clearly indicates that you can only borrow up to 80% of the difference of the amount or not more than 75% of the current market value of your property. (that includes your existing loan)
Based on Ali income, applying the TDSR, taking into account that Ali has no other financial commitments, he TDSR monthly instalment is S$4,800.
Balance with the capability of monthly instalment of S$2,825 (S$4,800 TDSR – S$1,975 existing loan instalment), he can borrow up to S$570,000 at an interest rate of 1.7% for a loan tenure of 20 years.
Cash-out for emergency usage
Waiver of TDSR
10 march 2017, MAS announced exempted owners with less than 50% loans on their properties, from the harsh TDSR regulations.
This relaxation was due mainly to retirees who were intending to monetise their homes for retirement through equity term loans on their properties but were restricted when TDSR was introduced in 2013.
This method allows owners to draw out an equity loan amount UP TO 50% of the property value without the need to fulfil income or asset pledging requirements, or to include their children’s name as guarantors for the loans in case their advanced age prevents them from doing so.
Mr Chan is 55 years old. Currently is currently running a business with a monthly income of S$12,000. He bought a landed terrace at S$800K 30 years ago, now his property is valued at S$2.5M.
He needs an extra cash flow of S$1M for the expansion of his business. With the ease off from the TDSR, not need to fulfil income and asset pledging requirement, the equity loan is less than 50% of the current market value of his property.
He got an Equity Loan of S$1M from the bank with an interest rate of 1.7% for a loan tenure of 20 years.
The above are some examples of how you can restructure your property loan in different scenarios and your needs.
I hope the above article can give you some ideas to restructure your housing loan to your utmost advantage. You can also take advantage of your existing property, maximise it for investment.
The Chinese have this saying, 危机就是时机, this could be your opportunity to start that retirement fund. After all, your money has to work harder for you.
If you’re at a loss about what you can do, you’re always welcome to get in touch with me, I have been working with a number of financial professionals over the years and will be happy to assist you to come up with a plan.
Please do share this article to someone facing challenging times, this may come handy at this difficult time.
Hi, I am Peter Tan.
Since 1995, I’ve been providing professional consulting services to clients in Singapore and beyond.
From strategic getting to innovative solutions, my focus is usually on building an efficient and results-driven relationship.
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