If you're in need of some extra cash, home equity loans, home loans and personal loans may be worth considering. Depending on the duration and purpose of the loan, one might be better tailored for your needs. For example, home equity loans and personal loans have a similar purpose where they allow the borrower to take out cash for any reason. Home loans, on the other hand, are used solely to help pay for a house. Despite the similar sounding names, home equity loans and home loans share only the collateral— your house. The interest rates, repayment schedules and requirements differ. Moreover, personal loans are much smaller and lent for a shorter time frame than the other two mentioned, rendering them optimal for smaller, specific purchases. The description of each loan below will clarify their major distinctions, guiding you to the best choice of loan for your situation.
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What is a Home Equity Loan?
Home equity loans, also known as property financing and second mortgages, are an increasingly popular way for Singaporeans to take out a large sum of cash using their home as collateral (usually up to 75% of the property value). Since you don't need to disclose the purpose of the loan, home equity loans are convenient for those who need money for debt consolidation and restructuring, or for large payments like education, medical bills or renovations. You can get a loan tenor of up to 35 years or until you turn 75 years of age— whichever is shorter.
|Home Equity Loans
|A large loan for any purpose
|To purchase a home
|Small, shorter-term needs
|Average loan amount
|Up to 80% of your property
|Up to 75% of your property
|Up to S$250,000
|Up to 7 years
|Average Interest Rates
|~8% EIR p.a.
Home equity loans are only available for people who own private properties and HDB Executive condominiums. You can get a home equity loan from a traditional banks like HSBC and UOB at rates tied to SIBOR, which guarantees transparency in the repayment process. Since interest rates tend to be around 1% p.a., home equity loans are some of the cheaper financing options on the market. However, you should note that just like home loans, you will need to pay valuation and legal fees that can range into a couple of thousands of dollars.
Home Equity Loans vs. Home Loans
While home equity loans and home loans sound similar, their purposes are actually very different. Unlike home equity loans which you can use for anything, home loans (property loans) are a way for people to procure funding to buy a new house. However, some features are similar, such as the maximum financing (up to 75% of the property value) and tenor (up to 30-35 years) As there are both loans for private properties and HDB flats, choosing the best one for your situation is important.
To qualify for a home loan, you must be 21 years or older, have good credit, and a minimum annual income of S$24,000. Similar to a home equity loan, you can borrow money for a long time, so the interest rates will be one of the most important factors in deciding which provider to go with. Most home loans average between 1%-3% for fixed or floating packages, but over a long period of time even the smallest difference can cost you a substantial amount. The reason home loans have low interest rates is because they're considered "secured" loans, where you risk your house if you default. If you would like a home loan, try our Home Loan Calculator to check which loan works best for you.
Home Equity Loans vs. Personal Loans
Personal loans lend significantly less over a shorter time period than home equity and home loans. Unlike home equity loans, personal loans are "unsecured" and are not backed by any collateral. Because they're unsecured, personal loans come with higher interest rates and fees. Furthermore, the true cost of your personal loan will be determined by its effective interest rate, which includes the annual flat rate (typically between 5-8% p.a.) and various fees and promotions. However, personal loans may be more preferable for those who need quick cash.
Another difference between personal and home equity loans is the size of the loan. While home equity loans let you borrow up to 75% of the value of your home, personal loans are pegged to your income. However, like home equity loans, personal loans do not require you to disclose a specific purpose for the loan.
How to Find the Best Loan for Your Needs
To briefly recap, home equity loans are recommended for people who need to have a large sum of cash at hand or are looking for an affordable debt consolidation option. Home loans, on the other hand, can only be used to purchase your home. Lastly, personal loans let you take out cash for any reason but have higher interest rates than both home equity and home loans. Regardless of whether you are looking to buy a home, consolidate debt or need to fund a large project, there are things you need to look for with any loan package.
First, you should consider the interest rate. Interest rates are important since they will guide the total repayment cost. For example, home loan interest rates can vary between 1.3%-2.25%. Personal loans can also add up quickly. While the flat annual rate can look attractive, you actually have to look at the EIR, which can easily grow to be twice the annual flat rate. When you aggregate the payments over a long period of time, these small differences can easily add up! So finding a good rate could potentially save you thousands.
Next, you should also consider the loan tenor. While many firms might promote low interest rates and floating loan packages, the amount you will spend over a long period of time is almost always more than what you would pay for a shorter loan. This is true even when you compare the higher-interest rates of personal loans to the lower home equity loans. Take a look at the table below to see how much your monthly payments and total interest changes when you change the loan tenor on your mortgage.
|Total Interest Cost
Lastly, you should consider the miscellaneous costs like fees and lock-in periods. These include processing, cancellation and early/late repayment fees, all which are subject to individual banks. Furthermore, home loans have lock-in periods that are usually set between 0-3 years where you cannot break from the contract without heavy fines. Some home loan providers will offer to partially cover legal fee subsidies if you choose to refinance your mortgage with them, so if you are looking to save, rather than borrow, some extra cash, refinancing might be worth considering. While there is much to consider prior to obtaining a home equity loan, home loan, or personal loan, this guide explained some of the key differentiating factors to help you make the best decision possible.