Understanding what the bank wants for mortgage approval
Equity Cash out Loan – To convert the property value into a big lump sum cash we need without selling the property is welcomed by a lot of property owners.
(Please bear in mind that the application of equity cash out loans is only available to private residential property & commercial property owners. HDB owners could never do that.)
In the case of equity cash out loans, the property owners do not need to go through the lengthy selling process for raising the fund they require. The whole process could be as short as within a month after the new loan is approved by the bank. End of the day, the bank has the good value property as the collateral item and extends the loan to the borrower. The bank always provides a total loan amount lower than the market value of the property.
Well, the property owners may think that the bank has no risk… it is only half of the fact.
In term of any secured loan, the bank (lender) always looks into TWO major facts before approval: –
1. The quality of the asset
2. The quality of the borrower (individual or company entity & personal guarantor)
Quality of the asset – how to determine the definition of quality? It simply means whether this asset could be easily sold after the bank repossessed the property.
Are all types of property easily sold? The answer is ‘NO’. For example, some banks don’t accept shoebox condo units which are less than 60 sqm; And almost all banks won’t accept property located in or nearby red light areas. In Singapore, these areas are Geylang even-numbers Lorong.
Quality of the borrower – whether the borrower has the ability to repay the loan. If a desperate borrower declared zero income in the past 1-2 years, and he can’t prove his net worth, excluding property value, even if he has a fully paid-up $10 mil property, the bank will always reject the application.
Both of the above criteria are crucial to the bank before issuing a Letter of Offer to the borrower. Banks like to deal with customers with a good level of liquidity asset, such as fixed deposit, share, bonds & good earning capacity – in layman terms is – bank like cash than your big property.
Repossession of property and force-selling it in the market is always not a good option to the bank. The bank has to do a lot of steps and spend legal fees before they can force-sell the property and recover the loan. They are exposed to the risk by being sued by the property owner if the force-selling is not in good terms and price.
The Takeaway
The rules for equity cash of residential property becomes more striengent. If you have a lump sum of bonus or income, you should think twice before paying up your mortgage. You may not easily cash out whenever you need in future, you should consider parking a certain amount of money in other investment vehicles.
