It’s to get cash out of a mortgage. The official name coined by MAS for it is Mortgage Equity Withdrawal Loan (MWL).  Sometimes, it’s also called a 5^th charge loan as, in terms of rights to sales proceeds (in event of foreclosure), it sits behind private bank’s housing loan which has the first charge, and some other CPF Board charges (see illustration below). 

In our mortgage industry, we simply refer to it as an equity term loan, a cash-out mortgage loan, a home equity loan, or simply a term loan.  No matter what name it goes by, its significance is often underappreciated especially in the Asian context where debt is frowned upon.  But it’s all the rage in other places like the U.S. where you could even get the “equity value” out in the form of a revolving credit line – a very useful thing for asset rich cash poor baby boomers in need of quick cash for living expenses.  That’s how the name HELOC came about which stands for Home Equity Line of Credit.

In this article, we will explain the concept of a home equity loan and how it works.  At the end, we will provide links to articles which will explain in greater details the various applications of term loan, which many in the market may not be aware of.

Let’s start with a question before we go on to explain the concept and the usefulness of a term loan.

Q: What’s the benefit of upgrading from a HDB to a private property?

1. It’s a status symbol for “we have arrived” in life.
2. My spouse and kids will look forward to condo living as we can use the pool, gym and other amenities instead of going to public facilities.
3. Its value will appreciate over time in a land-scarce Singapore, hence it’s a great asset to pass down to the next generation especially freehold property.
4. There are no restrictions unlike public housing, so I am free to make plans to rent, sell or upgrade to bigger units anytime. 

While all the above can be valid answers, there is one lesser-known reason which is most pertinent for retirement and financial planning: Unlike HDB property (until the laws change), you can go back to the bank and ask for additional loan secured against a private property when its market valuation appreciates over time.

The figure above shows how an home equity loan works. Suppose you buy a private property at S$1 million with 25% equity or your own money, and 75% financing with a housing loan. After six years of servicing the mortgage where part of the monthly repayment goes to interests and part to principal-reduction, the debt portion of the property valuation goes down to S$650,000 while the equity portion rises to S$350,000. This increase of S$100,000 is what you “pay yourself” in a mortgage as opposed to paying rent which is 100% sunk costs. Meanwhile your property appreciates in value by 20% to S$1.2 million, which also adds to the “equity portion” of the property value.

For private properties, you can now go back to the bank and ask to “withdraw” more loan against this equity value of the property which has grown due to both capital appreciation and loan repayment, hence its official name of Mortgage Equity Withdrawal Loan (MWL).  In the illustration shown, the maximum term loan you can withdraw is constricted by a combined debt of up to 75% of the new valuation of S$1.2 million, i.e. S$900,000, consisting of S$650,000 of your remaining housing loan plus another S$250,000 in new term loan. This term loan is secured against the property, and disbursed to you in a lump sum cash, credited into your bank account. For those seeking withdrawal of term loan whilst refinancing the mortgage, this amount is credited to your bank account in a separate disbursement within 2 to 4 weeks following completion of the refinancing.

In Singapore, banks will gladly extend home equity loan to you after making sure they’ve excluded any CPF monies used in the property plus accrued interest to be returned.  This is because when it comes to foreclosure on a mortgaged property in Singapore, CPF Board’s charge (or claim) on the sales proceeds ranks behind financial institutions’ housing loan, but before that of any term loan extended.

Hence, there’s a higher risk for the bank to recover a term loan in mortgagee auctions in distressed markets. So, depending on the current market valuation, you may not always get the amount of term loan you like. Chances are higher if:

• You are a single-mortgage borrower with only one residential property loan.
• You didn’t use a lot of CPF monies for down payment and mortgage servicing.
• You don’t have much debt in the credit bureau records and are within the 55% Total Debt Servicing Ratio (TDSR) limit.
• You’ve been paying down the outstanding loan for a period of time. 

The formula to determine how much term loan one could “cash out” during refinancing is as follows:

MWL = 75% or 45% of the market valuation
    (for single or multiple-mortgage borrower respectively)
Less outstanding loan
Less CPF used on the property plus accrued interest to-date

For example, a single-mortgage borrower of S$855,000 with CPF usage of S$100,000 (including accrued interest), after paying down for 6 years during which time the property valuation has increased from S$1.33 million to S$1.6 million, could withdraw as follows:

MWL = 75% of S$1,600,000 (current market valuation)
Less S$855,000 (outstanding housing loan after 6 years)
Less S$100,000 (CPF withdrawn for housing plus accrued interest to-date)
= S$245,000

Incidentally, it’s almost impossible for someone with two or more mortgages to get a term loan as the formula starts off at 45% and not 75%, unless the valuation has skyrocketed for example landed properties bought many years ago with minimal CPF usage.

Though difficult to access, once granted, the good news is term loans are usually charged the same mortgage rate as your housing loan when you do a refinancing. This means you enjoy the lowest cost of funds! Some people refer to this as a cash-out refinancing or geared-up loan, when you ask for cash withdrawal secured against the property during refinancing. Though banks will reflect housing loan and term loan separately in your mortgage statement like two different loans, the same interest package taken will apply to both. The lock-in periods will be a month apart though since term loan is disbursed slightly later.

Finally, as promised, here are four creative applications of home equity loan which many in the market may not be aware of:

1. How to benefit from CPF Life even before turning 65?
2. Consolidate all your debt (including your CPF OA accruals)
3. Build retirement income in a different way
4. Buy a second property in Singapore without incurring ABSD

If you understand how human beings are creatures of habits, you will understand why the access to a home equity loan is the best motivation for wanting to upgrade from a HDB to private property.  The best reason for assuming a huge $1 million mortgage on a private property, is that you “force” yourself to become a millionaire literally!  You get into a “forced savings mode” where the equity value gets built up over long periods with all the disciplined repayments.  Eventually, you will own the asset fully over a 25 to 30 years mortgage term.  Meanwhile, you are able to tap on this rising equity value of your own-stay property over time for more ways to enhance your financial position.   

The best reason for assuming a huge $1 million mortgage on a private property, is that you “force” yourself to become a millionaire literally!

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 Singapore home loan, 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.

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