Do you know you can get cash out of your property without selling it? If you own a private property, or an executive condo past its Minimum Occupation Period, you can do this thing called “cash out refinancing”! It is also known by many other names like home equity loan, mortgage withdrawal loan etc, but they basically mean refinancing your property to borrow more money on top of what you owe on your mortgage.
There are a few compelling reasons why one should do this:
Get a sizeable amount of money at low interest rate
Most would be familiar with the rather pesky telemarketing calls from banks promoting things like balance transfers. I actually entertain such calls and ask them what their best effective interest rate is. From time to time, there are good promotional rates and I would readily borrow because it’s easy to generate some returns from it. Cash grows cash.
Since your property is the collateral, mortgages allow a much higher quantum of borrowing compared to balance transfers, and the interest rate is also relatively low.
Refinance now before rates go up further
Everyone knows that rates are rising, so refinancing now with a fixed package would allow you to lock in a rate for at least 2 years. Even if you’re not in need for money, you should still refinance to save on your mortgage for the next few years.
You can use this mortgage comparison tool to find the best loan packages to refinance with. Even if you are not yet due for refinancing, the tool can track your mortgage and notify you when it’s the best time to do so.
Mortgages are long-term loans
Mortgages are very long term: usually 20 to 30 years. This means that despite borrowing a large amount, your repayments are spread across many years, and you would be able to slowly repay the loan over time. If you’ve used the money towards investment or business ventures, the long tenure also allows time for your opportunities to bear fruit.
What can you use the cash for?
Personally, I would be using the money to put towards long-term investments. Over a long time horizon, I am confident that the returns would exceed the increased interest I pay as a result of a larger loan.
People with higher interest loans would obviously be much better off borrowing against their property for a low interest rate to pay off these loans.
Of course, you can also do things like pay for your and your children’s education, or do more frivolous things like buy a car. Okay maybe not a car, but hey it’s your life.
Do note that mortgage withdrawal loans are not allowed for HDBs, and any refinancing still follows the prevailing rules like Total Debt Servicing Ratio (TDSR) and (Loan to Valuation) LTV limit. Your monthly mortgage upon refinancing cannot exceed 55% of your gross monthly salary, and your total loan cannot be more than 75% of your property value.
The cash amount you are able to get is also affected by the amount of CPF OA savings you have used towards paying your property.
Finally, you need to incur some costs in the form of legal fees and valuation fees. Banks usually tangle cash incentives to subsidise these fees, so do shop around for the best deal for yourself.
It is perhaps obvious, but if you are unable to pay your mortgage liabilities, the bank can repossess your property. Also, interest rates may continue to keep rising, so increasing your loan quantum may be risky.
I personally view myself as someone who is rather risk averse, and yet I feel very comfortable taking on a larger mortgage loan… which I have, in fact. Still waiting for the application to be processed and for cash to be disbursed to my account 🤑
Would you be doing a cash out refinancing on your property?
Regardless, even if you don’t need the money, you should at least refinance “normally” to lock in the rates now before they continue to climb.
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