Property Renovation 101: Loans

Most people do research when looking for the best mortgage loans when purchasing their property. As your CPF savings cannot be used for renovation, improvement or repair work, the only alternative is to take up a renovation loan. Even if you have a lot of spare cash lying around, borrowing money to fund the renovation would be a financially feasible option, considering the current record low interest climate. Your spare cash could be made to work harder for you in other forms.

What is a renovation loan?

A renovation loan is a loan that you borrow from the banks /lenders when you require capital to renovate a property. Renovation loans tend to have lower interest rates compared to personal loans. The period of the loan is usually between 1 to 5 years. The amount you can borrow is Up to $30,000 or 6 times your monthly salary, whichever is lower.

It is used to pay for the costs such as electrical and wiring works, painting and redecorating works and structural alteration etc. Interest rates for renovation loans are typically lower than personal loans and differs from bank to bank. It is best to speak to them directly for their latest rates and T&Cs.

Who can apply?

Typically, you must be between 21-65 years of age and have a minimum annual income of at least S$24,000. For joint applications, at least 1 applicant needs to earn this amount or more. And of course, you need to show proof that you are the owner of the property.

What Can the Renovation Loan be Used For?

Renovation loans can be used to pay for parts of your renovation, including:

• Flooring and tiling

• Painting and redecorating works

• Built-in cabinets, carpentry works

• Electrical and wiring works

• Basic bathroom fittings

• External works within the compounds of your house, such as the balcony, roof etc.

An important point to take note of is that the renovation loan cannot be used to pay for furnishings or for any other purpose besides renovation.

Below, lets look at some factors you should consider when applying for a renovation loan:

Flat Rate vs Monthly Rest

When you borrow money, the first important factor is interest rate. For renovation loans, there are loans based on a monthly rest calculation, and loans with a flat interest rate. For monthly rest loan package, interest is calculated based on the outstanding balance of the loan. So, as you pay off your monthly instalment, the outstanding loan amount becomes smaller and the interest also reduces over time.

For flat rate loan packages, interest is calculated based on the entire loan amount and not what is outstanding. Flat rate packages interest rate is usually lower but if you look at the effective interest rate (EIR), you may end up paying more. EIR is the interest rate which reflects the total cost charged for using the loan.

Fees & Penalties

Besides interest rates, processing fees is another factor. Most banks charge a processing fee of 1% of the approved loan amount. Once the loan is approved and should you decide not to take it up, most banks would charge a cancellation fee of 1% of approved amount. Additionally, should you wish to redeem the loan before the tenure is due, there would be a pre-payment fee of 1% of the outstanding loan amount. Also take note that there are late payment fees if you do not pay the instalments on time.

Some banks like DBS, may have special rates for their existing banking customers and also promotions/freebies to entice new customers. It is best to speak to the different banks for their best rates and latest promotions and offers.

Once your loan amount is approved by the bank, the approved loan amount minus the processing and other fees (if any) will be disbursed to your contractor in the form of a cashier's order. Bear in mind that the lenders may conduct site visits to ensure that the loan proceeds are used for its intended purpose.

Ultimately, when shopping for a renovation loan, the primary factor you should consider is the overall cost of the loan and your ability to pay the instalment on time to avoid incurring additional costs.

Suggested reading:

• Real Estate Financing 101: Bridge Loan and Term Loan

• 7 Useful Tips on Managing Your Home Loan