• What is Cash Out Refinancing and How It Works

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    Cash out refinancing, also known as reverse mortgage, is a mortgage refinancing option that has been designed to help property owners convert the value of their property into cash. It offers a great way to raise funds for your financial emergencies without selling/renting the property and without applying for a new personal loan. Read on to understand everything you need to know and consider before you use this option.

    Understanding Cash Out Refinancing With an Illustration

    Assume that you have a property worth S$2 million in Singapore and you still owe S$500,000 on the mortgage. In this scenario, your home equity is S$1.5 million. Home equity is calculated as the difference between the property’s market value and the pending mortgage amount. Now, imagine you are facing a financial emergency. You don’t want to sell the property or take a new loan. In this situation, cash out refinancing could be an option for you. With this option, you can refinance your mortgage and borrow an amount that is larger than the existing loan. The difference between the two is what you would be able to take out as cash. So, if you need about S$500,000 in cash, you could borrow about S$1 million through a cash out refinancing arrangement. This way, your new liability would be S$1 million, but you would also have S$500,000 cash in hand, in addition to your S$500,000 outstanding mortgage.

    Is There a Limit on How Much You Can Borrow Through Cash Out Refinancing?

    Yes, it’s limited by the current market value of your property, your outstanding loan amount, and any CPF amount that you may have used while purchasing the property. In Singapore, lenders generally lend up to 80% of the market value of your property for cash out refinancing. So, in case of the above example, the maximum amount you can borrow under cash out refinancing would be: S$1.6 million (80% of S$2 million) – S$500,000 (your outstanding loan amount) = S$1.1 million. Now, imagine you also used S$100,000 from your CPF savings to pay for your property. So, your borrowing limit would come down to S$1 million (S$1.1 million – S$100,000).

    Why is Cash Out Refinancing a Better Option Than Personal Loan?

    • With cash out refinancing, you can borrow a much bigger amount, as compared to personal loans. Most personal loans in Singapore allow you to borrow up to four times your monthly income.
    • Since the borrowing under cash out refinancing is secured, with your property pledged as collateral, the interest rates are very low in comparison to personal loans that are generally unsecured.

    Things You Need to Consider Before You Use This Mortgage Refinancing Option

  • Lender can foreclose your property: Remember, if you can’t repay the loan, your lender has the right to foreclose your property. It’s important that you use this option only for emergency funds requirements.
  • Monthly repayments: Once the loan is disbursed, you will have to make monthly repayments for a fixed tenure. Make sure your monthly income is enough to cover these monthly instalments.
  • Property valuation fee: These loans often come with high administrative costs due to the legal and property valuation charges involved.
  • Time for loan disbursal: Unlike personal loans, these loans often take a few weeks for the bank to disburse.
  • Make sure you compare your options, chalk out your repayment plan and keep to it because this may seem like the perfect solution to your current financial predicament, however, defaulting on this loan could lose you your home.

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