What You Need to Know About Cash Out Refinancing
Unless you own an original printing of Shakespeare’s First Folio, a Ming dynasty vase or your grandfather’s Patek Philippe – your most valuable asset is your home.
What you probably didn’t know about your home is that it can be a source of cash for dealing with financial emergencies. A home equity loan, otherwise known as cash out refinancing, enables you to borrow at a ridiculously low interest rate between 1% and 2% using your home’s equity.
However, this type of loan is only available to private property owners, as HDB flat owners aren’t eligible.
How Much Can You Borrow by Cashing Out?
Banks will only let you borrow up to 80%* of your home’s market value. If you have more than one mortgage, the most you’ll be able to borrow is 60%.
How much you can borrow also depends on your outstanding mortgage and any CPF monies used to purchase the property.
Let’s say that you own a 2-bedroom condominium that’s valued at S$1 million.
Margin of finance – 80% (S$1,000,000 *80% =S$800,000)
Outstanding home loan amount – S$200,000
CPF monies used for home purchase- S$150,000
Here’s how much your bank will let you cash out:
S$ 800,000 (80% of the SGD $1 million market value of your property)
– S$ 200,000 (outstanding home loan amount)
– S$ 150,000 (CPF monies used for home purchase)
= S$ 450,000 you are able to cash out
*Margin of finance is solely dependent on banks’ decision.
When Does It Make Sense to Cash Out?
Remember – the only reason you can borrow a substantial sum at such an incredibly low interest rate is because you’re using your home as a collateral. So think twice before you come to this decision!
Here are some situations that is considered acceptable to cash out:
- Finance your business: You want to finance your own business without taking out a business loan with an interest rate of more than 10%
- Medical expenses: You need to pay off personal medical expenses or those of a family member
- Consolidate debt: You want to to pay off debt like credit card bills or other debts at an interest rate that’s much lower than a balance transfer or personal loan
Cash out refinancing can be a good way to borrow the
you need at a much lower interest rate – but before you cash out, consider the following:
- Beware that you’re taking on more debt: Make sure you’re borrowing only what you need and have the means to afford the monthly repayments.
- Beware of margin calls if you haven’t paid off your property: This is when the bank asks you to top up your home loan (e.g. You owe $600K on a $650K property, but its valuation drops to $550 – so the bank issues a margin call for $50K you have to pay with cash or CPF funds). Keep in mind that a drastic drop in your property’s value might warrant a margin call.
- Beware of default risk if you have paid off your property: Defaulting on a home equity loan will put your property at risk.
Before you cash out, make sure you’re prepared for unexpected emergencies by building an emergency fund and having adequate insurance coverage.
If you want a “safer” way to borrow without using your home as collateral, you might want to consider taking a personal loan instead.
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.