Should I get a personal loan or access my equity?

Two methods that are helping borrowers consolidate their debts.

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Not everyone has the good fortune of having their finances just as they need them to be when unforeseen expenses appear on the horizon. Fortunately, it has become easier to utilise credit for dealing with these situations. But credit has a downside, too. If you’re overly reliant on loans and credit, you might eventually find it hard to keep track of all the loans you’ve taken up. If you’re in this situation, consolidating your debts into one loan could be a solution to consider. Typically, people take out personal loans or home equity loans to consolidate their debts.

WARNING – Consider your own circumstances, or obtain advice, before you act on the general information contained in this article.

home-loan-imageSo, what is a home equity loan?

Home equity loans let you capitalize on the equity you have in your existing home. They enable you to utilize the capital gains of your house without needing to sell it. Your home equity is essentially the current value of your property minus the mortgage you owe.

Eligibility for home equity loan

In Singapore, you’re only eligible for home equity loans if you own a private property. HDB flats are not allowed to be used as a collateral for home equity loans or cash out refinancing. If you own an Executive Condominium (EC), you’ll only be eligible after you’ve fulfilled the 5 years MOP (Minimum Occupation Period). Another limitation to take note of if you have an outstanding home loan is that you can only apply for a home equity loan from the same bank as the one you’ve taken the home loan from.

Your options may be rather limited if you’re looking to borrow a large amount of money. With home equity loans, you can capitalise on the equity you have in your existing home. This option enables you to utilise the capital gains of your house as collateral, allowing you to borrow up to 80% of the value at a low interest rate.

If you have yet to pay off your home loan in full, you’ll be borrowing from the portion of the property that is fully paid, which is the property value minus any outstanding loan amounts, as well as any CPF (Central Provision Fund) used for the property purchase. This is known as cash out refinancing, or mortgage equity withdrawal loans.

For instance, consider that you own a house with a current market value of S$1,250,000 and you wish to take out a maximum loan of 80% of the property’s value (S$1,000,000). However, you still have an outstanding loan amount of S$250,000 and you have paid S$500,000 with your CPF so far. The total amount that you’re eligible for a term loan would be S$1,000,000 minus S$750,000, which is S$250,000.

What you need to know about personal loans for debt consolidation

Many people take out personal loans for meeting a wide range of needs. When you take out a personal loan for debt consolidation, you will need to consider the early repayment costs of your existing loans. Doing so will help you determine whether the cost of consolidating your loans is more than the money you’ll end up saving.

There are a number of different types of personal loans, such as home renovation loans, education loans, business loans, and so on. Debt consolidation loans are designed to help you bring together separate loan and credit accounts. There are a few types of different loans that can be used to consolidate debt, so make sure you have considered your personal situation and find one that is suitable for you.

Compare your personal loan options

Name Product Interest Rate From Effective Interest Rate Minimum Loan Amount Maximum Loan Amount Loan Tenure
HSBC Personal Loan
3.7%
7%
S$5,000
S$200,000
Up to 7 years
Apply by 29 February 2020 and get a promotional interest rate from 3.7% p.a. (EIR 7% p.a. is only applicable to customers with annual income of at least $80,000, and tenor between 3-7 years) and receive S$108 cashback plus S$88 processing fee waiver. T&Cs apply.
Standard Chartered CashOne Personal Loan
3.88%
7.63%
S$1,000
Up to 4x fixed monthly salary, subject to a cap of S$250,000.
1 - 5 years
Receive up to S$1,088 cashback and S$160 Anniversary Cashback on your approved loan. Ends 31 March 2020.
Citibank Personal Loan
4.55%
8.5%
S$1,000
S$100,000
Up to 5 years
Receive cash starting at 4.55% p.a. (EIR 8.5% p.a.) on a 36-month loan tenure.

Compare up to 4 providers

home-equity-vs-pls

Are home equity loans better than personal loans?

Both home equity loans and personal loans offer specific benefits. In particular, the former is useful when you have aggregated equity in your house, while the latter is useful especially if you don’t have any assets to guarantee the loan.

Home equity loans can also offer considerably lower interest rates than personal loans. Keep in mind, however, that this interest is spread over a much longer term – 25 or 30 years compared to a maximum of seven years for a personal loan. Because of this, it’s likely you’ll pay more with a home equity loan and puts you back in a revolving debt.

Home equity loans

Pros

  • High loan amount. Typically, most banks will allow you to borrow up to 80% of your property value.
  • Lower interest rate. Most home equity loans offer very low interest rates of around 1%.
  • Lower credit score requirement. Even if you have a less than desirable credit score, the lender will most likely approve your home equity loan since your property will be pledged as collateral.

Cons

  • High upfront fees. Property valuation is mandatory for home equity loans, which will cost around S$2,000 to S$3,000.
  • HDB flats not eligible. Only private properties may be used to take up a home equity loan.
  • Long approval time. Typically, a home equity loan requires around 2 to 4 months for approval.
  • Longer loan term. The maximum loan tenure for home equity loan is 75 years minus your current age, and the number of years you’ve spent servicing the loan if your property still has an outstanding loan amount.
  • Property as collateral. If you default on your equity loan repayments, the bank has the right to repossess your property.
  • Cash out refinancing must be taken from the same bank. If you are still servicing a home loan for the property you wish to take a cash out refinancing on, you can only apply with the same bank.

Personal loans

Pros

  • Fast approval. Personal loans may be approved from as fast as an hour to a few business days.
  • Term. Loan period generally ranges from one to seven years, so you don’t need to worry about carrying debt over an extended length of time.
  • No collateral required. In Singapore, most personal loans are unsecured. This means that unlike home equity loan, you will not risk having your property repossessed if you default on your payment.

Cons

  • Lower loan amount. Depending on your annual income, you may only borrow up to 2 to 4 times your monthly income. If you’re earning more than S$120,000 p.a., you may borrow any amount the lender approves.
  • Higher interest rates. Interest rates for personal loans are typically between 3% to 6%.
  • Higher credit score requirement. Since most of the personal loans are unsecured, the lenders will impose a stricter credit score criteria as they’re taking on a higher risk.

Bottom line

The key to consolidating your loans lies in maintaining the same repayment levels at lower interest rates without extending the life of your loans. So if you have significant equity in your home, require a sizable amount of money (that’s upwards of S$100,000), spreading out your debt at a low interest rate over a longer period with a home equity loan is probably the way to go.

However, it is worth noting that the longer you carry your debt, the more you pay in interest. On the other hand, if you don’t have equity in your home, require a lesser amount of money, or need cash fast, a personal loan might be just what you need.

Whether a home equity loan or personal loan is better for you, it all depends on your circumstances. Focus on what’s right for you, based on your specific situation, and conduct your research on the various lenders and products. Also, be mindful that just because you have equity you shouldn’t keep borrowing against it.

Focus instead on living within your means and avoid spending more than you earn. This approach will make your credit report look good and keep your debt manageable. It will also make your life easier and relatively stress-free


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