Cash Out Refinance
Getting Your Assets to Work
What is Cash Out Refinance?
Cash out refinance (or equity refinance) is using your property as a collateral for a bank loan while you take out cash. It happens when you have equity in your property. Meaning: Your outstanding loan on your property is much less than the valuation of your property. It is similar to asking a secured loan from a bank for your fully paid property.
Do note that in Singapore, this form of refinancing is only available to private properties. You CANNOT refinance a HDB to get cash. Also private home owners who utilised their CPF to pay for their house will need to “pay back” this CPF amount plus interest charged. Below are 2 examples:
Cash Out Refinance WITH CPF Contributions
Say you have bought your property 15 years ago at $600,000 which is now valued at $1,000,000. You have paid $200,000 using your CPF including interest payable to CPF, $100,000 in cash with outstanding loan of $300,000. Say the bank is able to offer you at 80% loan of the property valuation at $800,000.
The equity you have on your property is $800k-$300k (outstanding loan amt) = $500,000. However because you have used $200,000 from CPF, you need to “pay back” CPF this sum of money. Therefore the actual cash can have is $500k-$200k = $300,000.
Technically speaking, you are borrowing this amount of $300,000 at the refinancing rate offered by the bank.
Cash Out Refinance WITHOUT CPF Contributions
Say you have bought your property 15 years ago at $600,000 which is now valued at $1,000,000. You have paid $300,000 in cash with outstanding loan of $300,000. Say the bank is able to offer you at 80% loan of the property valuation at $800,000.
The equity you have on your property is $800k-$300k (outstanding loan amt) = $500,000. You do not need to “pay back” your CPF contributions since you paid all in cash. Therefore actual cash you achieve is $500,000.
Therefore you are in fact borrowing this amount of $500,000 at the refinancing loan rate offered by the bank.
In the example above, it is not easy to get a loan of such quantum usually. Sometimes you may be in need of some extra cash but where can you find cheap borrowing? This is an option for getting cash without selling your property. You can pull equity out of your investment property for further re-investment too. Below are some reasons why some people cash out on home equity.
Property loan is considered one of the cheapest form of borrowing. The interest rate is usually much lower than personal or business loan. It is a form of secured loan which uses your asset(s) against the loan. You can cash out refinance for commercial or private properties. In fact many property investors use cash out refinance to buy their second or third home. But do note in the event you are not able to make the repayments, the bank can foreclose your property.
The rich gets rich by making their money work hard. Therefore the additional equity that you may be sitting on your private property can be put into use to generate other income. Of course the returns make from borrowing should outweigh the costs of borrowing. Be sure the investment is not high risk because in the event you cannot repay the bank, you might end up losing the property.
As we are not financial advisers, we cannot advise you what to invest with the extra cash you can take out from refinancing your mortgage. But you get our idea.
You may consider to refinance your house to pay off some debts with a higher interest. For instance, in the example above, if you are currently paying a $100,000 loan with an interest rate of 5%p.a., it make more sense in getting some cash back from the mortgage refinance (say refinance rate at 2%) to pay down this $100,000 which you are paying a much high interest rate.
Another typical debt to clear is credit card outstanding payments which could be over 24% p.a. That would be a great call to cash out on your property to quickly make the payment.
There are many other use of the cash on hand other than spending it away. Just to list a few ways some people may put that money into good use:
- Start a business;
- Children’s studies overseas;
- Parents helping children to pay for down deposit for new home;
- Refinance for renovation of your home to increase asset value;
- Medical emergencies.
Cash out refinance can be a powerful tool. Therefore we do not take it lightly. We do not encourage owners to cash-out refinance for materialistic matters. Note that the bank can foreclose your property if you fail to make repayments.
Cash Out Refinance Terms
All the terms such as the refinance interest rate, LTV (Loan to Value), tenure of loan are similar to the normal change-term refinance. However, the cost of cash out refinance is typically higher than the usual change term refinance. It can cost you up to $3,000 for the legal fees and excludes other costs such as administration and valuation fees. You may want to take into account of such fees before deciding on cashing out your real estate.
Do take note that LTV varies if you are performing cash out refinancing on your second or more property.
Looking to Cash-Out Refinance Your Mortgage? Talk to Us.
Cash Out Refinance could be a big decision in your life. You may want someone familiar with it to be with you in the process. We promise a good listening ear to your needs. Drop us a note, request a call back or whatsapp us directly. We would love to help.
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