If you are living in a HDB flat that hasn’t been renovated in more than 15 years, it might be time for an upgrade. Your floors are worn out, furnishings are out of style, and things might be broken all over the place. Home renovation is quite popular in Singapore, but not everyone can afford it because of their costs. On average, Singaporeans are known to spend about S$50,000 to S$60,000 on home renovation for a HDB flat and up to 20% of your home value. If you are looking for ways to finance such a big project, you should know that home renovation loans are available at attractive rates. Here, we assess various aspects of a home renovation loan in Singapore, and compare its costs with other options available in Singapore.
Average Cost of Home Renovation Loan
On average, home renovation loans in Singapore charge about 5% of interest rate and a one-time upfront processing fee of 1-2%, for a total cost of about 6-7%. Unlike other a normal instalment loans that banks provide, a home renovation loan’s interest rate is called a “rest rate.” This means that you pay an interest payment on the outstanding balance of your loan. Because the borrower is required to pay the interest and a portion of the principal every month, both the outstanding loan amount and interest payment decreases over time. This allows the borrower to pay down the debt quicker than he would otherwise.
|Loan Tenure||Average Interest Rate of Home Renovation Loan|
In some cases, banks will also offer you a flat rate home renovation loan. We advise you not to go with these options. Unlike a rest rate, flat rates charge you a constant amount of interest every month even while you are paying down your debt. Because of this dynamic, flat rate loans tend to be more expensive than a rest rate loan.
Lastly, it’s possible to get lower rates than these listed above if you already have a working relationship with a bank. In cases where you already have taken out a mortgage, that bank will reward you for “loyalty” if you go to them for a renovation loan. Typically, these discounts are about 0.5%-1%, which can add up to a meaningful amount over time. You can also check out our list of the best renovation loans in Singapore.
Home Renovation Loan vs Personal Loan
When you need a loan to finance your home remodeling, you should always get a home renovation loan instead of a personal loan. One thing you should always understand about banks and their loans is that they are trying to manage risk of lending out money. To banks, unknown factors are equivalent risk. Because a personal loan can be used for any purpose, they represent higher risk to banks and thus come with higher interest rates.
On the other hand, a home renovation loan’s purpose is specific. Therefore, the lender knows more about the borrower, and is willing to lend at a lower rate. For instance, a personal loan in Singapore usually comes with an effective interest rate around 12%-15%. In comparison, a home renovation loan with 6-7% cost (5% interest + 1-2% fee) is definitely the better deal.
Home remodeling loans are also a rest rate loan, while a personal loan is a flat rate loan. To see this difference in action, we have done an example analysis. Let’s say Jim wants to borrow S$15,000 from a bank for 1 year. Option A is a personal loan with a 7.8% flat rate and zero fees (16% effective rate), and option B is a renovation loan with a 4.88% rest rate. Option A would require a monthly payment of S$1,348 and total interest paid of S$1,170. In contrast, Option B would have required a monthly payment of S$1,284 and total interest paid of only S$408.
What Can You Use A Home Renovation Loan For?
Normally, a renovation loan comes with some strings attached and won’t allow you to spend the money on everything you want. For instance, the bank will only allow you to use this loan to finance major home remodeling projects like the following:
- Electrical and wiring works
- Carpentries like built-in cabinets
- Painting and redecorating works (i.e. wallpaper)
- Structural alterations (i.e. tearing down walls)
- External works within compound of the house
- Flooring and tiling
- Basic bathroom fittings
Therefore, if you want to do other things like appliances (A/C, fridge, washing machine) and furniture, you would have to pay out of pocket on your own. If you can’t pay for them upfront with cash, a personal loan might not be a bad option as opposed to building a credit card debt with higher interest rates. Just make sure to use your rewards credit card to pay for these though. Rewards credit cards in Singapore have quite generous offers like cash rebates, so that it can reduce your total cost quite meaningfully. By using these cards to pay for your furniture and remodeling contractors, you can earn various awards like discounts, cashbacks and airmiles on your purchases.
Remodeling your home can be a complex, arduous and expensive process. It’s not something that can be taken lightly because you are likely stuck with the new look for at least a decade once the renovation is done. Hence, you should carefully consider your options in terms of style, contractor and financing options so that you don’t have regrets. There are 167 registered renovation contractors in Singapore that offer services for HDB flats. Make sure to consult multiple services and shop around for best rates before launching your big project.