What is Equity Loan, Term Loan or Cashout?
Equity Loan is also known as term loan or cashout. Client pledge the property to the bank or financial institution to get cash for personal use. The loan amount available is much more than taking a personal loan as the property acts as collateral to the bank. Since there is collateral, the bank view this type of loan as lower risk, thus, interest rate is much lower compare to personal loan. Usually the interest charged is the same as home loan. Equity loan can be taken up together with home loan.
Generally the bank uses the following formula to calculate equity loan:
70% (or 75%) x property valuation – total outstanding loan – total CPF used and accrued interest = Total equity loan available
Mr Tan bought a property of 1m 5 years ago and took a loan of 800k.
5 years later, property appreciates to 1.5m.
Total loan outstanding remaining is 700k
Total CPF used and accrued interest = 100k
Total equity loan available = 70% (or 75%) x property valuation – total outstanding loan – total CPF used and accrued interest
Total equity loan available = 70% x 1.5m – 700k – 100k = $250k