What is Cash Out Refinancing, and How Can Singaporeans Use It?

If you own private property in Singapore, cash out refinancing lets you borrow cash at a very low interest rate. But there's a catch.

Cash out refinancing (also called a reverse mortgage, or second mortgage, or “cash out refi” for short) is a way for property owners in Singapore to unlock the monetary value of their home. Used properly, cash out refi can be a powerful tool for debt consolidation or low-interest funds. But it should never be taken lightly, as your home is used as collateral.

Here is how it works in Singapore.

What is Cash Out Refinancing?

Singaporeans usually make money from their flat by renting it or selling it. Cash out refinancing provides a third alternative. For example:

Say you own a flat that’s worth S$1.6 million, on which you still owe the bank S$300,000. But now you are facing an emergency - perhaps you need money for medical care, or to look after another family member.

Instead of taking out more expensive personal loans, you use do cash out refi using your flat. For example, you can borrow S$500,000 using your flat as collateral. In effect, you would now owe S$800,000 on the flat, but you would have S$500,000 in cash. This is why a cash out refi is also called a “reverse” or “second” mortgage - you are taking back the money you've already paid for the flat.

This often sounds intimidating, but there are situations in which it is a prudent financial decision (we will explain this further below).

Cash out refi is only an option for private housing. You cannot do this with your HDB flat.

How Much Money Can You Borrow?

The amount you can borrow is (60% to 80% of market value) - (Outstanding loan amount) - (CPF funds used so far).

For example, say you own a condo with a market valuation of S$1 million, on which you still owe S$300,000. In order to make the initial down payment, you used S$150,000 from your CPF Ordinary Account (CPF OA).

The bank agrees to loan you up to 80% of the market valuation of your flat. Banks will loan between 60% to 80% of your property value for a cash out refi. If you have only one property loan, you can usually get the full 80%. If you have more than one outstanding property loan, you will usually get 60%.

The amount you can borrow, in the above example, would be S$350,000:

S$800,000 (80% of market value of your property) - S$300,000 (outstanding loan amount) - S$150,000 (amount used from CPF) = S$350,000.

Note that the amount you can borrow is much higher compared to unsecured loans like personal loans, which are typically restricted to four times your monthly income.

Another thing to note is that the loan amount is based on market valuation, not on the price you bought a property at. So if you purchase a property for S$1 million, and the market value of the property appreciates to S$1.4 million, the amount you can borrow is potentially 80% of S$1.4 million (S$1,120,000).

What is the Interest Rate for Cash Out Refinancing?

The interest rate you pay for cash out refinancing is exceptionally low, due to the use of your property as collateral. Typical interest rates are around 1% per annum.

Now, you must be thinking, “That means I can borrow loads of money for cheap! Why doesn’t everyone do this?”

A cash out refi is not a decision to be made lightly. The main reason is that your home is used as collateral for the loan. If you are not clear on what that means, let us state categorically that if you cannot repay the loan, the bank has a right to foreclose on your property.

The second problem is that, if you hope to use cash out refinancing someday, you must be servicing your home loan in cash and not your CPF funds (see our example above).

The third problem is that a cash out refi has very high administration costs. The bank has to send someone to conduct a valuation of your property, and a law firm has to draft the legal paperwork. This can result in an administrative cost of between S$2,000 to S$3,000 just to get the loan.

This also means a cash out refi is also not a “quick, on demand” type of loan (that is what credit cards and lines of credit are for). It can take several months for a cash out refi to be approved; most banks have a processing time of at least 2 months.

Determine exactly how much you need before making the loan application, as you will incur the administrative cost and long wait every time you make a cash out refi application.

When Should Singaporeans Use Cash Out Refinancing?

There are a number of situations when a cash-out refi is advantageous:

• Debt consolidation
• Low cost capital
• Medical emergencies
• Overseas tuition

1. Debt Consolidation

If you own an expensive condo apartment, but are deep in high-interest debt (say personal loans or credit card debt), a cash out refi is an alternative that prevents you having to sell your property.

For example, say you owe S$100,000 in high-interest debt (24% per annum). At a massive repayment of S$2,500 per month, it would take you close to seven years to repay the full amount.

As an alternative to this, you could do a cash-out refi using your flat, and then use the money from the cash out to repay the S$100,000. You would then owe S$100,000 at 1.5% per annum instead; repaying S$2,500 a month, you would repay the debt in little over 2 years.

This means you save over S$150,000(!), if you compare repaying S$2,500 over 2 years versus 7 years.

While this is one of the most common reasons to use a cash out refi, always speak to a qualified financial advisor before taking this step. We remind you, again, that you will be using your home as collateral.

2. Low-Cost Capital

Although we advise against this, some Singaporeans use cash out refinancing in order to obtain capital. This lets them start or expand a business.

Note that new businesses have a hard time getting a bank loan (a business loan typically requires your business to have been operating profitably for at least 2 to 3 years). Also, a business loan will have a much higher interest rate than the cash out refi.

Aside from these factors, a cash out refi provides a sizeable amount of money compared to other loans. 4 times your monthly income will probably not suffice to open a cafe or expand your manufacturing facilities.

Despite the popularity of this, we advise against the use of your flat as collateral for your business (unless you own more than 1 home).

3. Medical Emergencies

In the event that your Medisave is depleted, or your insurance is insufficient, cash out refinancing provides a cheaper source of loans compared to credit lines. However, speak to your local government officials or social welfare bodies before doing this. Cash out refinancing should only be used once you have exhausted all other options.

The advantage of cash out refinancing is that you don’t have to actually sell your flat in order to pay the bills.

4. Overseas Tuition

If you want to send a family member abroad to study, the costs can be prohibitive. While education loans are easy to find, they may not be sizeable enough for your needs. An education loan of S$100,000, for example, is almost certainly insufficient for a 4- to 5-year degree at an American university.

Cash out refi can provide the large sum needed, but be aware that you are risking your home to do this.

Avoid Using Cash Out Refinancing for Non-Essential, Personal Needs

You can use a cash out refi to buy a car (it’s cheaper than a car loan), to pay for a wedding, or to buy designer clothes. However, none of those things are more important than your home, which will be foreclosed on if you can’t pay up.

Furthermore, a cash out refi means you need a longer time to pay off your home loan.

If you have personal needs that require money, we have easier and safer solutions. Check out SingSaver.com.sg to find a low-interest personal loan like Citi Ready Credit Paylite. These can help you out without putting your home at risk.

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