Setting up a new home can be an exciting time – until you realise the costs involved to create your dream home. But don’t let financial pressures deter you; there are ways to help you set up that safe haven you call home - a personal loan or renovation loan, for example.
The first way to finance your renovation is to look into a renovation loan, which is offered by a few banks in Singapore like POSB, DBS and OCBC. Under this loan, you can borrow up to $30,000 or six times your monthly income, whichever is lower. You can choose a repayment period of anything from 1 to 5 years.
Unfortunately, there are drawbacks to taking a renovation loan, one of which is that you can borrow a maximum of only $30,000, which may not be enough to cover your total renovation costs.
Also, a renovation loan is strictly for renovation-related works like tiling the floor, painting the walls and electrical wiring. It does not apply to things like installing curtains or purchasing a sofa set (you'll need a personal loan or home loan for that).
On top of that, applying for a renovation loan requires you to submit a renovation contract or a quotation from the contractor because the bank wants to know where its money is going to go, which can be a tedious process.
Another way you could raise cash for your renovation is to apply for a personal loan. Personal loans are offered by most banks and under this loan, you get cash, and possibly, a higher loan limit than that of a renovation loan. A personal loan can be spent on anything you want, like furniture for your new house.
What's the difference between a personal loan and renovation loan?
Here are some other differences between a renovation loan and a personal loan that you might want to consider before choosing between the two to facilitate your renovation.
Do all banks offer it?
Not all banks offer it. Banks like DBS/POSB and OCBC offer renovation loans, but banks like UOB, HSBC and Citibank do not.
Who can apply for the loan?
Only the homeowner, or the homeowner’s family members can apply for a renovation loan. Joint applicants must be the main applicant’s parent, spouse, child or sibling. They must also meet the income requirements.
Anyone who meets the income requirements can apply
What is the minimum income requirement?
You need to earn at least $24,000 a year. If you are making a joint application, the main applicant must earn at least $24,000 a year and, for POSB and DBS, the joint applicant must earn at least $12,000 a year.
Banks like POSB, DBS and OCBC require a minimum annual income of $20,000. Other banks like UOB and HSBC require a minimum annual income of $30,000 a year.
What is the maximum loan amount you can take out?
$30,000, or 6 times your monthly income, whichever is lower.
For joint applications, the cap is $30,000, or 12 times the monthly salary of the lower income earner.
If you earn more than $20,000 but less than $30,000 a year, you can borrow up to 2 times your monthly salary.
If you earn more than $30,000 but less than $120,000 a year, you can get cash of up to 4 times your monthly salary.
If you earn $120,000 and above a year, you can borrow up to 8 or 10 times your monthly salary, or up to $200,000, from banks like POSB, DBS and HSBC.
One to five years
One to five years for most banks, but HSBC offers up to seven years for salaried workers
What you can use the loan for
You can use the loan only for renovation-related works such as electrical and wiring works, built-in cabinets, painting and redecorating works (such as wallpapering), structural alterations, external works within compound of the house, flooring and tiling and basic bathroom fittings. The loan cannot be used to buy things like furniture.
You can use the loan for anything without having to show proof.
Interest rates vary between banks.
Currently, OCBC is offering a rate of 2.63% per annum for applicants who already have home loans with it and 2.86% per annum for new customers, while DBS and POSB are offering rates of 2.88% per annum for existing DBS Home Loan customers and 3.88% per annum for non-DBS Home Loan customers. (As of 22/7/19).
Interest rates vary between banks.
Currently, DBS and POSB are offering rates as low as 3.88% per annum if you meet their criteria. (As of 22/7/19).
However, note that the interest rate offered to you is based on your personal credit and income profile and may differ from the published rate and the rate offered to other borrowers. For example, if your annual income is below $30,000 and you are eligible for the loan, you will be offered a rate of 11% per annum.
How is interest calculated?
On a monthly rest rate basis.
This means interest is calculated based on the outstanding balance of the loan. As you pay off your outstanding loan amount every month, the interest also reduces over time.
On a flat rate basis.
With a flat rate, interest payments are calculated based on the original loan amount. The monthly interest stays the same throughout, even though your outstanding loan reduces over time.
You need to present a renovation contract or a detailed quotation from your contractor on top of your proof of income documents.
You need to submit your proof of income documents.
How is the money disbursed?
Cashier's orders for the loan amount will be issued to the contractor's company name.
The money will be credited into your designated bank account upon approval.
Should you take a renovation loan or a personal loan?
The prevailing belief is that it is better to go for purpose-specific loans like a renovation loan or a car loan rather than a general loan like a personal loan; it is believed that purpose-specific loans offer better interest rates than personal loans.
This is true to some extent; banks often offer a better interest rate for renovation and car loans because your house or car become the collateral which the bank can seize if you default on repayments.
A personal loan, on the other hand, require no collateral. This carries a higher risk for the banks, which they try to mitigate by charging a higher interest rate.
Furthermore, the interest for renovation loans and personal loans are calculated differently. Interest for renovation loans go on a monthly rest rate, which means interest is calculated based on the outstanding balance of the loan. As you pay off your outstanding loan amount every month, the interest also reduces over time.
On the other hand, the interest for personal loans are calculated on a flat rate basis. This means interest payments are calculated based on the original loan amount. The monthly interest stays the same throughout, even though your outstanding loan reduces over time.
However, banks do sometimes offer promotions on personal loans, either in the form of reduced interest rates, processing fee waivers, or even supermarket vouchers.
Currently, DBS is offering cashback on online applications of personal loans. Approved loans of $30,000 to $49,999 will get you a cashback of $688 while approved loans above $50,000 will get you a cashback of $888 (accurate as of 22/7/19).
Promotions change all the time, and under the correct conditions, a personal loan could be just as attractive as a renovation loan.
What are some other benefits of personal loans over renovation loans?
Here are some other ways a personal loan has an edge over a renovation loan:
You may be able to borrow more with a personal loan
A renovation loan is capped at $30,000. Even if you can afford to take out a bigger loan with a higher repayment, you won’t be able to borrow more than that.
A personal loan, on the other hand, has a much higher cap – if you earn at least $120,000 a year, you can borrow 8 to 10 times your monthly salary, depending on the bank.
The final amount you can borrow under either loan, of course, will depend on your income and credit profile.
You don’t have to earn as much to take up a personal loan
On the other hand, if you are just starting out in your career, you may not meet the minimum income requirement for a renovation loan, which is $24,000 a year. Banks like POSB/DBS and OCBC, however, require a lower minimum income of $20,000 a year to qualify for a personal loan.
A personal loan doesn’t care what you’re using the money for
Renovation loans can be used only for works like structural alterations, retiling the floor, painting the walls or building cabinets. You cannot use the loan to buy furniture or appliances. On the other hand, you are allowed to spend the money from a personal loan on anything you want, be it for buying an air-conditioning system for your home, or buying a new home entertainment set.
A personal loan requires less paperwork
Banks want to be sure your renovation loan really goes towards renovation. As such, they will require that you provide a renovation contract or a detailed quotation from your contractor before they will extend you a loan. This is on top of requiring your income documents. But the banks don’t care what you do with a personal loan, so to apply for one, you just have to produce income documents such as your latest 3 months' computerised payslips.
Personal loans can have a longer tenor
While most banks offer a loan repayment period of 1 - 5 years for both renovation loans and personal loans, HSBC offers a repayment period of up to 7 years for personal loans if you are a salaried worker. Taking out a personal loan with HSBC will give you a longer time to pay back your loan, thus easing your financial pressure. Do note, however, that the longer you drag out your repayment, the more you will pay in interest.
Where to find the best personal loans
Convinced you need a personal loan? Skip the hassle of surfing individual banks’ websites to try to find out about the personal loans they are offering. Instead, go straight to a comparison website like GoBear, which will search personal loans from nine major banks in Singapore, offer an unbiased comparison rating of the banks and also show you all the latest promotions in one place.
To start your search in GoBear, first, click on “Personal Loan”, then enter the amount of money you wish to borrow. After that, enter the number of years you want to repay your loan, and your monthly income.
Click on “Show my results” and you will get a list of banks that can offer a personal loan to you. You will also be shown details such as the maximum amount you can borrow, the monthly repayment, the interest rate, the total amount of interest you end up paying at the end of your tenure and the processing fee for your loan. This will be based on the details you enter when you start your search.
You can also select several banks to compare the rates side by side.
Happy with what you see? Click on the “Compare Personal Loans” green bar and you will be taken to the bank’s website to apply.
And there you go, a personal loan to set up your home. Home sweet home, here you come.
Brought to you by GoBear Insurance Broker (SG) Pte. Ltd., a registered insurance broker with the Monetary Authority of Singapore
Woodpecker Asia Tech Pte Ltd (UEN 201420994D) operates the GoBear websites which compares financial products in 7 countries.
GoBear Insurance Broker (SG) Pte Ltd (UEN 201924067K) is a registered insurance broker with The Monetary Authority of Singapore for insurance broking business which does not include other services such as credit cards and loans.