If the value of one’s property that is mortgaged to the bank has gone up over the years, one could then take out more leverage or debt in the form of an equity term loan for various purposes like investment (buying the bank’s stocks as what we have recommended earlier) or even to buy a car instead of taking a conventional car loan on hire purchase.
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Equity term loan (ETL) is only for private properties and not HDB. This is one reason put forth by some property investment gurus why a private property makes a better investment property rather than a HDB even though the latter almost always fetch a higher cap rate (capitalization rate or yield). One does not need to sell away the investment property to “unlock” its value but rather just take “cash out” when the value appreciates, or some bankers will call it “gear up”, in the form of a term loan. Such term loan (in short) is amortized in the same manner as the housing loan but usually on different interest as most borrowers take up the term loan at a later stage. When there is a term loan on top of a housing loan, banks can still take over both loans during refinancing in the same manner – splitting into two parts and taking over housing loan and term loan separately but applying the same interest rate package. The two cannot be combined as only the first loan taken on a new property is considered a housing loan, all subsequent loans taken on the same property will be considered ETLs which carry a higher risk to the bank. Let me explain why.
We often say that term loan is a 5th charge loan – behind that of housing loan and CPF amounts used, in the event of a default or foreclosure. Should the borrower be unable to service the loan and the bank foreclose and auction off the subject property, all sales proceeds will be paid out in the following sequence:
Outstanding housing loan (Bank or HDB)
CPF principal sum used up to 100% of Valuation Limit plus whatever amount that has been used for legal fees, stamp duty & survey fees
3rd Charge (pari passu or equal ranking):
CPF principal sum beyond 100% of Valuation Limit and CPF accrued interest;
Outstanding housing loan interests
4th Charge (pari passu or equal ranking):
CPF Board’s legal costs and expenses;
Bank’s legal costs and expenses
Any other monies owing to the bank under the mortgage like equity term loan
For an even clearer idea refer to the Terms and Conditions on the use of CPF savings under CPF Residential Properties Scheme on the CPF website. The relevant extract is reproduced here for your easy reference.
As term loan is a 5th charge loan, it carries more risk for the bank and hence it will less out the CPF used to- date in calculating the maximum term loan available to a borrower, using the formula 80% of valuation less CPF used to-date less outstanding housing loan. Do note that however different banks may have different practices when it comes to the maximum term loan allowed depending on their own credit policy, and factors like whether this is the only housing loan for the borrower or there are multiple mortgages, foreigner versus local etc. If you are looking to gear up, we suggest you speak to one of our experienced mortgage consultant to find out more.
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