This is part of a 4-part series on the clever use of debt for savings and investments, we look at the use of home equity loan for debt consolidation which some clients are not aware of.

The official name for it is Mortgage Equity Withdrawal Loan (MWL) as coined by MAS, or what is commonly referred to as term loan in our industry. It’s only available for private properties, not for HDB (until the law changes).  The idea is you can “cash out” with taking more loan secured against the equity portion (as opposed to debt portion) of your property value if you’d been paying down the principal sum of your mortgage loan over a period of time, whilst the valuation has also risen. You are “withdrawing” from this increased equity value over time, hence the name. Don’t miss the other articles in this 4-part series to find out how MWL can be used to:

• Benefit from CPF Life even before turning 65
• Build retirement income in a different way
• Buy a second property in Singapore without incurring ABSD

I helped one client who came to us to refinance a residential property loan of $400,000.  The problem is the bank she likes to refinance to does not provide cash rebate or legal subsidy for private property loans below $500,000.  Upon conversing, I found out she and her husband also service two other small commercial property loans, about $250,000 each, which are due for review soon.  These properties were bought under their personal names.  They’re going to encounter the same predicament – all banks tier their interest rate packages according to loan amounts and provide better rates and higher legal subsidies only for bigger loans, which typically start from $500,000 upwards.

Eventually we helped this client consolidate all their loans onto one single residential property mortgage of $900,000, comprising $400,000 housing loan and $500,000 home equity loan.  Not only does the client enjoy a much better rate for loan amounts above $800,000, she gets a much higher cash rebate than usual as banks then were competing aggressively for clients with bigger loans (back in October 2023). Not only that. The client used the term loan, disbursed in one lump sum to her bank account, to make full payment and discharge their two other commercial property loans thereby saving them not just interests and fees, but much time and effort henceforth.

Residential mortgage loan should always be the last loan to pay down for two simple reasons: it’s the least cost secured against a collateral (your property), and it’s the safest especially for own-stay property.  Banks simply have no interest to foreclose on a property as it means they have more work to do in terms of administration and marketing the unit in auctions.  They’re only interested in earning the interest income from the mortgage. In periods of economic distress, government might also step in to provide relief measures when there’s widespread hardship in repayments due to the social impact of mortgages.

You may think residential mortgage interest is extremely high right now at high 2s to over 4 per cent, wait till you learn unsecured loans charge effective interest rate at 7 to 8 per cent and so do all the hire purchase loans like auto loans, personal loans, etc.  Unsecured lending headline rates may seem low for example at 2.88 per cent for some, but the effective rate when you translate it to amortisation basis (monthly Principal + Interest) is almost double that!

If you do not service a car loan, you may think that mortgage is your only debt.  Unfortunately, most of us use our CPF funds for property down payment and loan repayment over the years.  Do you know that can also be construed as a form of debt?  You “owe” yourself the accrued interest, which is to be paid from future sales proceeds of your property.

It makes financial sense to do some debt consolidation or paying down of debts with higher interest with debt which charge a lower interest rate. The latter will typically be funds raised from a home equity term as explained. In other words, you should try to clear off all other debts starting with unsecured loans which charge the highest effective interest rate.

In essence, you are transferring all other debt “under one roof” to a mortgage loan which is the least cost and the safest loan. I will go through five common debts in this article.

1. Car Loan

This is likely the most common loan that most will service given the prices of COEs and cars in Singapore.  Car dealers often insist that you take a car loan through them otherwise they will either add on a surcharge to the car price or sell the car to someone else who does.  It’s an open secret.  We all know they make good commission on the loan from the banks.

One way to get around this is to take the loan first but repay in full at the earliest when repayment is allowed.  However, doing that attracts another penalty by way of the rule of 78 where the bank will charge you more to account for the interest they would have otherwise earned had you not repaid the loan early.  Subject to detailed calculation on cost versus benefit, my gut feeling and indeed personal experience is, it will still be cheaper to incur that extra penalty and clear off this loan by “transferring” the debt owed to a mortgage at a much lower interest rate.

On a side note, doing that does mean that your debt now “shows up” in official records as a mortgage term loan, as opposed to private credit from car dealers where such debt servicing gets hidden from credit bureau.  And if you are thinking you can service the “car loan” now from CPF, the bad news is – you can’t service term loan monthly repayment from CPF.  That’s only for housing loan (term loan monthly repayment amount is separated from housing loan).

2. Personal Loan or Line of Credit

This might be a common debt for those who like to splurge on luxury goods and services and who find themselves needing that extra line every month for spending.  To be fair, there are also those who draw down on such facilities for other purposes like working capital for business, investment, emergencies, etc.  Whatever is your purpose, if you are liable for such high interest for a while, the only logical thing to do is to consolidate them all into one loan.

However, this is likely to be the debt that’s the hardest to consolidate as you will be subject to stringent TDSR stress test ratio which you might already be unfavourably predisposed to in the first place.

If you do not own a car, you may think that mortgage is your only debt.  Unfortunately, most of us use our CPF funds for property down payment and loan repayment.  Do you know that can also be construed as a form of debt?  Do you know that can also be construed as a form of debt?  You “owe” yourself the accrued interest, which is to be paid from future sales proceeds of your property.

3. Commercial or Industrial Property Loan

Given the exorbitant ABSD over the years, more and more people have veered to invest in commercial properties in their personal names.  As what I shared in my client’s case earlier, it makes a lot of sense to transfer such debts to a residential mortgage loan especially when the properties are all under personal name and not a company.

Some of the salient benefits are:

• Pay a much lower interest rate on residential properties when compared to commercial property loan rates (typically 1% higher be it fixed or floating rate)
• Access more options for refinancing as there are limited number of lenders for commercial properties, especially for industrial B1 units
• Do away with the need to constantly monitor multiple loans and review every two years
• Circumvent the need to pay repricing fees, admin fees, legal and valuation fees, and generally a much higher transaction cost base for commercial properties each time you change or vary the package (reprice)
• Avoid paying the penalty (sometimes 2%) due to sale of property during the lock-in period (It is difficult to sell a commercial property with comes with high thereafter interest rates as borrowers tend to jump from one lock-in to another lock-in).

There’s only one small setback in transferring commercial property loans (in personal name) to residential term loans. You can’t clear off the commercial property loan entirely yet with the new funds from the home equity loan. This is because there’s usually a 3-year claw back period for legal subsidies even after the lock-in ends. What you can do though is to just pay off the bulk of the outstanding commercial loan first leaving behind just $10,000 (maybe even $1,000 for some banks) in which case a 6 to 8 per cent thereafter interest rate on such small principal sum is nothing. You got to wait for another year before finally closing the loan account.

It will be harder to consolidate commercial and industrial property loans bought under investment-holding companies, as company funds are not supposed to be mixed with personal funds.  Directors will have to offer interest-free loan to the company for loan redemption if you like, but there are implications on tax, accounting, etc.

4. Overseas Property Loan

This is an area where it also makes financial sense if you are paying a much higher mortgage interest rate for your overseas properties especially in certain jurisdictions which offer no fixed rate option for foreign investors

Still, be cognizant of other pertinent considerations like tax planning, currency exposure, availability of interest-only mortgage or interest-offset account, ease of taking back term loan on the overseas property should the need arises, etc.  Not to mention, if you transfer an offshore debt to an onshore banking institution here, it will reduce your borrowing capacity in terms of TDSR limits if you are thinking of buying again in Singapore.

5. CPF OA (Ordinary Account)

Out of sight, out of mind.  This is true as well for our CPF funds when some might discover to their surprise at age 55 that there are insufficient funds to set aside for the highest tier of CPF Life (the national retirement annuity scheme), if you fail to leverage the power of compounding even at 2.50 per cent over your entire working lifetime.

It is true mortgage rates may be somewhat higher than 2.50 per cent at the moment, so it makes more sense to pay down your mortgage than returning money back to your CPF OA account. However, it is also true that mortgage rates will not stay high forever – typically interest peak cycles are short-lived when measured against a 30 year mortgage term.  If you pay down your mortgage today with all available cash, and interest rate tumbles within the next 12 months to 2 per cent or lower, you would have no more money left to clear your “CPF debt” where the interest you “owe yourself” will snowball over long periods at 2.50 per cent. Instead of letting GIC take on all the investment risks to pay you that risk-free interest, you end up paying it from your own pocket from your future sales proceeds.

Finally, even if residential property loan is indeed the only debt you are left to service, there’s still much better use of any extra cash on hand than to pay down on the mortgage. Do explore some of these other clever ways of using extra cash or available funds from a home equity loan as outlined at the beginning of this article.

Need more personalised advice?  Not only do we help clients navigate through the myriad of mortgage rates quick and fuss-free and get you the best home loan Singapore, we show you how to become Mortgage-Free in 6 Years! So, be it for residential or commercial property loan, work with us today and you’ll also be helping to support our social cause!

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Disclaimer: MortgageWise Pte Ltd is not in the business of providing financial advice nor are we licensed or regulated by MAS under the Financial Advisory Act (FAA) in Singapore. All information presented are opinions and any representations given, whether by way of example, illustration or otherwise, are purely portfolio allocation advice and not recommendations or inducements to buy, sell or hold any particular investment product or class of investment product.  All opinions are generic in nature and are not tailored to the particular circumstances of any reader.  Seek advice from a qualified financial advisor before making any investment decision.

Though every effort has been made to ensure the accuracy of the information and figures presented, we make no representations or warranties with respect to the accuracy or completeness of the contents in this blog and specifically disclaim any implied warranties or fitness for a particular purpose.  We shall not be held responsible for any financial loss or any other damages suffered whatsoever, directly or indirectly, if you choose to follow any of the advice or recommendations given in this blog.