Introduction
It’s not common for Singapore property owners to research this topic.
You belong to a niche, resourceful group of owners looking to explore the less conventional path to play the property game.
We believe this is the way to succeed, to build a life beyond the mindless 8 to 5. One day, we hope to bump into you slow walking down your favourite park on a Working Day, free from the leash of salaried life.
The focus of this article
This article focuses on discussing how we can go about leveraging our current property for funding to realise our goals of owning a 2nd or 3rd property.
This is a topic relevant to readers in the following circumstances.
- You currently own a fully paid up private property that has appreciated significantly in value. Wants to retain the property for homestay, but is looking for ways to unlock its capital gain to purchase another property.
- You currently own a partially paid up private property that has similarly appreciated in value and is looking to unlock its capital gain to purchase another investment property.
- You already own 2 properties and unlock equity from your current properties to fund the purchase of a 3rd property under your child’s name.
- You are an interest rate optimiser. You currently own a property that has little to no outstanding debt and own another investment property locked into a higher interest rate loan. You are locking to unlock equity to reduce outstanding loan and interest expense on the investment property.
This article is not applicable to you …
- If you own a HDB flat. Unfortunately you can’t take up a home equity loan on a HDB flat.
- If you are looking to unlock equity to pay off other debts like credit cards etc.
Quick Introduction – Decoupling Expertise
We are a team of realtors that thrive in complex real estate situations. We pride ourselves in helping our client navigate and derive the best strategies to own their 2nd and 3rd properties in Singapore.
Our capabilities fall within the intersection of real estate investing, financing strategies and real estate legal and regulatory consideration.
Topics that fall within our niche, comprise of the following.
- Reverse equity loan to unlock equity from current asset
- Decoupling property to minimise ABSD on second property
- Structuring HDB ownership for future ownership of second property
- Property portfolio optimisation for owners planning for retirement
- Property inheritance and next steps consideration
- Alternative property investment – industrial and commercial property investing
- Property consideration in view of divorce
Home equity loan or Equity term loan as the official term for this process
For those uninitiated, the official term for taking up a loan by using your existing property as collateral is known as either Home equity loan or Equity term loan.
Home equity loan refers to the act of taking up a loan off a property that is fully paid up. While, Equity term loan refers to the act of taking up a loan off a property that is partially paid up.
Either way, the concept is similar, it involves using your current property as a collateral to take up a low interest rate loan from the bank.
Having successfully applied for the loan, with cash deposited into your bank account. You will have options with regards to how you would like to deploy the funds, with some restrictions to be noted.
Just in case you get confused when you see this term being thrown at you, term loan, reverse mortgage, cash out refinancing, they all mean the same thing.
But what differentiates you from the rest, is that you are looking to do this to expand on your investment gains, and not to jeopardise your home for the sake of paying down unhealthy debts like credit loan etc.
Technically, you cannot use a home equity loan to purchase another property.
Technically, according to MAS, you cannot leverage on a home equity loan to purchase another property. But as a lender, you can use a home equity loan to pay off or pay down an outstanding mortgage.
Similar to the common use case of debt consolidation, whereby lenders utilise a home equity loan to pay down other higher interest rate debt like credit loan, renovation loan etc.
Financial and legal disclaimer
* At this point, it will be apt to share a disclaimer.
Please do not take this as official financial or legal advice. To assess the validity of your consideration please drop us a whatsapp text and we will rope in our mortgage specialist to guide you through the process.
Examples and Use cases
In the sections that follow, we will plot out all the possible use cases or funding strategies that can be considered to optimise your property portfolio.
#1 – Using equity from current homestay property to buy another investment property
Consider the following use case. You and your spouse currently jointly own a private condo, you purchased it several years ago at $1.5mil and it has since appreciated to $2.0mil.
You are looking at paper gain of $500k. But you are unable to access the unrealized gain locked up in the property as you are unwilling to sell the property, given your family enjoys living in it and its location is proximate to both kid’s school and work.
Using a home equity loan to unlock capital gain.
One consideration would be to take up a home equity loan on your current property, and use the loaned funds to the purchase of the 2nd property by “paying down the outstanding loan” to be taken.
Consider a situation whereby your maximum eligible loan quantum falls short of the required amount to fund the 2nd property, or the interest rates offered for the 2nd property are more costly than that of your home equity loan. Using a home equity or term loan would address these issues.
Sounds good, but the solution is flawed.
You would have solved 1 part of the puzzle pertaining to purchasing a second property, which is to finance it with the lowest cost funding source.
But you would not address the issue of ABSD on the 2nd property. The 20% ABSD for citizens and 30% ABSD for PR will still render your initiative unaffordable and unprofitable.
Decoupling as a better solution to unlock capital and overcome ABSD.
Specifically for the use case of unlocking capital from a property that is jointly owned under both spouses name to purchase another property, decoupling would be a much more optimal solution.
For context, decoupling refers to the act of freeing up one owner’s name from a jointly owned property. As part of the process, one owner would have to sell his or her 50% share in the property to the other owner, valued at the current market value of $2.0mil.
The process of having the “staying owner” buying over shares from the “leaving owner” at the new appreciated market value using a new enlarged loan amount, indirectly achieves the same outcome to be achieved via a home equity loan solution.
Simultaneously the removal of 1 spouse’s / owner’s name from the property allows you to circumvent the hefty ABSD to be levied on the 2nd property.
#2 – You currently own the property under 1 name. And is looking at purchasing another property under your spouse name.
Expanding on the use case above. If you are already owning a property under 1 name and your goal is to help fund the purchase of the 2nd property under your spouse name.
The home equity loan or reverse mortgage solution will make more sense.
Consider the following use case.
You started out purchasing and owning your current private property solely under your name and have since fully paid up the property.
You are now planning to purchase a 2nd investment property under your wife’s name. But an obstacle arises when your wife’s income is sufficient to qualify for the loan quantum required to purchase the 2nd property.
And you can’t assist her by adding your income into the equation as your name is not included in the ownership of the 2nd property.
Leverage on home equity to facilitate the purchase of 2nd investment property.
Here’s where your home equity loan comes to the rescue. What you can do is to take up a home equity loan using your existing property as collateral, receive a loaned cash amount and fill the gap resulting from the insufficient loan quantum.
#3 – You and your wife jointly own 1 property. You would like to purchase a 2nd property under the child’s name.
This use case is common for couples that are unwilling or unable to decouple.
You currently own a private property that is fully or partially paid up with little outstanding loan. And you plan to purchase a 2nd property using your child’s name, assuming he or she is 21 years old and above.
Hurdle : Minimal loan quantum for your child
The major hurdle you will face is that your child being young in age and early in their career would have limited income and qualify for minimal loan.
Leverage on home equity loan to support your child in financing the 2nd property.
Here’s where the home equity loan comes into play. You will take up a home equity loan on your current property and assist your child in reducing the outstanding loan requirement on the 2nd property.
For relevant reads on purchasing a 2nd or 3rd property by using your child’s name refer to the following article link inline.
#4 – You and your wife each own 1 property. You are looking to acquire your 3rd property under your child’s name.
Level 2 monopoly ! This is applicable if you already have 2 properties in your family’s portfolio and are looking to acquire the 3rd property using your child’s name.
Similar to the use case #3 listed above, you can leverage on potentially the existing 2 properties’ equity to take up a 2 home equity loan to support the funding requirement for the 3rd property under your child’s name.
#5 – Interest rate and expense optimisation
This is applicable for financially savvy homeowners, we reference this from several of our readers that have been using this hedge fund inspired interest rate strategy.
It is commonly called a carry trade in the finance world, eg. you borrow cheap yen to purchase high interest rate USD bonds and profit off the interest rate spreads.
Consider the case whereby you own a resale condo that is either fully or partially paid up. And you own another new launch property that is yet to be constructed. Typically the new launch property will be restricted to a variable interest rate package. Assuming the variable rate package has a high interest rate.
You can leverage on your existing property to take a lower interest rate home equity loan to reduce the outstanding loan on for the new launch property when it is out of its lock in period.
#6 – Funding the construction of a landed property
Another advanced use case. Consider the situation whereby you own a fully paid up private condo and you have purchased a run down freehold landed property using your wife’s or your child’s name.
You may have enough funds to finance the purchase of the landed property but you could be lacking funds to redevelop it, to enhance it and build it up for a profitable flip.
This is when you can consider taking up a reverse mortgage or home equity loan on your current property to finance the redevelopment of the landed property.
When should you avoid taking up a home equity loan on your property ?
The key risk to note is that your property will be seized by the banks if you are unable to finance the monthly repayment for the home equity loan.
So the safety measure that you should put in place is to only proceed when leveraging to fund an initiative that is of equal risk profit or lower risk profile than your current property.
Let’s articulate this with some good examples and bad examples.
Obvious suboptimal examples
- Using home equity loan to finance a risky business venture – business riskier profile than your homestay property
- Using home equity loan to fund a leverage equity trade – equity of a riskier profile than your homestay property.
- Using home equity loan to fund a home renovation for a homestay property – unproductive leverage
- Using home equity loan to fund a car purchase – unproductive leverage
Less obvious risky examples
- Using home equity loan of a homestay property to fund a 1 bedroom investment property – 1 bedroom of a riskier profile than a 3 bedroom homestay property
- Using home equity loan of a homestay property to fund a overseas property – overseas property is of a risker profile than a 3 bedroom homestay property
- Using home equity loan of a homestay property to fund a industrial property – industrial property is of a risker profile than a 3 bedroom homestay property
Optimal example – when risk profile is matched.
- Using home equity loan of a 3 bedroom homestay property to fund another 3 bedroom property – matched risk profile
How much home equity loan can you take on your current property ?
If your property is fully paid up
The maximum loan quantum you will be eligible for is calculated by the following formula.
Equity Loan Quantum = (75% x Market value of property), less CPF utilised with accrued interest
If your property is partially paid up with an outstanding loan.
Equity Loan Quantum = (75% x Market value of property), less CPF utilised with accurred interest, less outstanding loan amount
CPF utilised will always be deducted from the equity loan quantum
A point note is that which amount you have utilised from your CPF for your current property cannot be included in the equity loan amount.
Hence you will always see CPF and its accrued interest being netted off the overall equity loan quantum. This is to prevent you from “round tripping” converting your cpf to cash via this indirect process.
Additional criteria restricting your home equity loan amount
TDSR is still applicable.
TDSR limits will be applicable for your home equity loan. Your monthly recurring loan payment must not exceed 55% of your gross monthly income.
This includes any existing monthly mortgage that you are currently paying.
Exception to TDSR
An exception to TDSR limits on home equity loan is applicable when you keep the loan to valuation ratio for the home equity loan to 50% instead of the maximum 75%.
Can you take up a home equity loan on HDB flat ?
Unfortunately, HDB flats do not qualify for a reverse home equity loan. Home equity loans are only available for private properties.
HDB is not permitted to be used as a collateral for any financing purposes.
The only way for a HDB owner to unlock equity in a HDB flat is through the HDB’s Lease Buyback Scheme.
But certain eligibility criteria needs to be fulfilled before being eligible for the scheme. Some of the key criterias include owner being age 65 and above and must have a gross monthly income of $14,000 or less.
Details to note when using a home equity loan as a financing solution
Loan Tenure for your home equity loan
The maximum loan tenure for a home equity loan stands at 35 years or until the borrower’s age of 75, whichever is lower.
Can you use CPF to pay off a home equity loan ?
Unlike typical mortgages, you will not be able to use CPF to pay off the monthly payment for a home equity loan or a reverse mortgage loan.
Fees and cost of taking up a home equity loan
The administrative fees for taking up a home equity loan ranges from $2,500 to $3,000.
Duration for home equity loan to be approved
It typically takes 2 to 4 months for a home equity loan to be approved.
You will have to take the home equity loan from the same bank
A property cannot be used as collateral by two banks, hence you will be restricted to taking a home equity loan from the same bank.
