What you need to know about renovation loans
Renovation loans are best for exactly that - home renovations. Or is it? We compare renovation and personal loans to find out which is best for your new home.
There is a loan for just about everything in life: housing loans, car loans, personal loans, business loans, education loans, library loans, etc. But how much do you know about renovation loans?
When you buy a new home, you can’t possibly leave the walls bare and floors untiled. Nor would you want to settle for the previous owner’s lack of décor sense. Surely, you need to hire a contractor and an interior designer to help spruce the whole crib up.
Depending on how vast a makeover you want, we are playing with a wide range for renovation costs. Home décor specialist Qanvast canvassed the public in Singapore and found that back in 2017, average home renovations cost for HDB flats was $53,000 without including furnishings. That is hardly affordable in a single lump sum payment. In light of that, we break renovation loans down to the simple FAQs to help you decide if you should take it up together with your housing loan.
You are allowed to borrow a maximum of $30,000 or up to 6X your monthly income. Approval is subjected to your total debt servicing ratio (TDSR) and, of course, your credit score. This may or may not cover the entirety of your renovation costs; if you would like to bash past the maximum amount you can borrow or skirt around the TDSR limit, consider roping in your spouse or a family member (must be either parents or siblings) for a joint application.
The main and joint applicant has to be earning an annual income of at least $24,000 and $12,000 respectively. Minimum loan amount of $5,000 applies.
What you can spend renovation loan on
Unlike personal loans, you can’t really go free-willy with your renovation loan. It is subjected to approved areas of spending, such as electrical works, built-in cabinets, painting, flooring and bathroom installations. That means whatever falls outside of what’s considered renovations –like furniture—is likely non-negotiable. For renovations done in a HDB flat, only HDB-licensed contractors can be engaged to carry out the works.
Is taking out a personal loan better then?
With higher borrowing limits, sign-up freebies and practically zero impositions on what you can spend on, it may be. That is, until you realise you could be looking at higher interest repayments and poorer credit score if you struggle to finance the loan.
Another trait about renovation loans that makes them more attractive than personal loans lies with the packaged insurance. If anything untoward happens to the applicant, like death or total permanent disability, the insurance provider settles the outstanding amount. This is available only in selected renovation loan packages.
Effective interest rates
You are effectively going about your calculations all wrong if you are not looking at the effective interest rate. Take the DBS Renovation Loan for instance. The bank promises an interest rate as low as 2.31% for existing customers who have housing loans with them. But the figure is merely a flat rate. To get the actual interest you will be financing, you should be focusing on the effective interest rate (EIR). In this case, it is 4.38%. The EIR factors in the applied interest rate of the loan together with all the fees like processing fee or administrative charges.
Staggered loan disbursement
Got trust issues with your contractor? You can get that peace of mind you want by splitting the disbursed loan over the progress of the renovation works. The maximum number of cashier orders is dependent on the bank of choice. Some will waive the cashier’s order fee.
Other fees to note
There is a processing or handling fee, usually set at 1% of the approved loan amount. And then there is the ever-lurking administrative fee. Remember how renovation loans have packaged insurance as their trump card? Sorry to disappoint but that does not come free. The cash you eventually get your hands on is net of the insurance premium and all the groan-inducing fees.
Whether you are fashioning your humble HDB into a heartland boutique hotel or a condominium apartment into a Scandinavian wonderland, compare renovation loans on GoBear for unbeatable interest rates and monthly repayments!