What is a Property Term Loan / Cash Out Equity Term Loan?
A property loan holds five ranking charges to it. The property mortgage loan holds the primary first charge. This is to say that in the event of a default payment and foreclosure by a bank or HDB, the proceeds from the sale of your property are first used to pay off the outstanding mortgage loan owned to the bank or HDB.
The remaining proceeds after paying off the 1st charge mortgage loan are then used to pay off the remaining secondary charges.
Please see below for a full list of the five ranking charges:
- Mortgage Loan (Bank or HDB)
- CPF principal sum up to 100% of Valuation Limit plus CPF used to pay the legal and stamp fees in the purchase, and cost of upgrading under the HDB Main Upgrading Programme.
3rd charge (Equal ranking):
- CPF principal sum beyond the 100% Valuation Limit plus accrued interest.
- Repayment of outstanding balance of the housing loan interests.
4th charge (Equal ranking):
- CPF legal costs and expenses
- Financier's legal costs and expenses
- Cash out Equity Term Loan / Property Term Loan
When can you cash out equity from your property?
Let’s use an example for illustration. David owns a private property and has an outstanding mortgage of about $300,000 with Bank A. The property valuation of his house has risen over the years and is now worth about $1,200,000. He has used about $100,000 of CPF monies. David does not own any other properties in Singapore.
David has intention to start a new business with a friend and needs capital for it. He is considering doing a cash out equity term loan on his property.
How much equity can David cash out from his property?
Banks typically have lending limits of between 70% to 80% max for cashing out equity from a property. Assuming Bank A allows David to apply for an equity cash out term loan of up to 80% of the property value:
(Up to 80% LTV)
$1,200,000 * 0.8 = $960,000
Net of outstanding mortgage loan $300,000
Net of CPF monies used $100,000
Max property term loan eligibility = < $560,000 subject to meeting debt servicing ratio requirements and bank approval.
The max amount of property term loan that David is eligible is up to $560,000 subject to debt servicing ratio and bank approval. The interest rate terms and tenure are typically similar to the 1st charge mortgage loan.
A cash out property term loan is applicable only for private residential properties, commercial properties, industrial properties and overseas properties for Australia and London,UK. Public HDB housing development flats are not eligible for an equity release property term loan.
Contact us for a further discussion of an equity release from your property today!