After buying a new house in Singapore, the first thing that comes to mind is renovation so that it truly feels like home. But after investing such a large sum in purchasing your dream home, finding more money to fund the renovation can be difficult.
Even if you haven’t purchased a new property and are only looking to upgrade your existing one, the amount required is usually substantial. So dipping into your savings or borrowing from loved ones may also not be enough. This is when a home renovation loan can help.
What is a renovation loan?
A renovation loan, as the name suggests, is a sum dedicated to finance your home renovation. The interest on renovation loans is lower than personal loans.
However, the lower interest rate of the renovation loan brings with it some constraints, such as limitations on the type of improvements you can make using the loan, or where the money from the loan is paid directly to contractors or interior designers.
The highest amount you can borrow from a bank is six times your monthly salary or $30,000, whichever is lower.
While examining various renovation loan packages, you should also check whether the handling fees are included in the loan amount. Some lenders, like DBS bank, also impose a 1% mandatory fee on the approved sum as an insurance premium to deal with any outstanding loan amount in case of total permanent disability or death.
Where can renovation loans be used?
Renovation loans can only be used for:
- Wiring and electrical works;
- Flooring, wall painting, and tiling;
- Carpentry works, like, bedroom and kitchen cabinets and wardrobes;
- External compounds, fences, roofs, etc.
Please note that the cost of purchasing furniture and electrical appliances is not included in a renovation loan.
Eligibility for a renovation loan
Although the specific details may vary somewhat for various loan providers, the general eligibility criteria for renovation loans include:
Citizenship: You have to be either a Permanent Resident or Singaporean
Age: Applicant must be between 21 years and 65 years of age
Income: Some banks like CIMB and OCBC need the applicant to have an annual income of $24,000. In the case of joint applications, OCBC requires at least one of the applicants to meet the minimum salary requirement
Ownership: You must be either the owner or a close relative of the owner of the house you wish to renovate
Loan tenure: Typically between one and five years
What is the maximum amount you can get for a home renovation loan?
A loan can also be referred to as the loan quantum or principal. The amount you can get from the bank mainly relies on the plan offered.
According to the Total Debt Servicing Ratio (TDSR) framework, at most three-fifths of the monthly income can be utilised to repay the loan. It is the ratio of the total amount to a monthly salary which cannot surpass 60%.
For instance; if a person’s monthly earnings are $2,000, then, the TDSR has a $1,200 limit. If the person has a car loan of $800 and a housing loan of $700 per month which means a $1,500 monthly loan payment in total (TDSR of 75%), then the person would not be able to apply for a renovation loan.
Understanding the interest rates for renovation loans
When it comes to renovation loans, some lenders calculate interest based on monthly rest rates, whereas some adopt a flat rate.
Simply speaking, for loans calculated at a monthly rest rate (commonly referred to as reducing interest rate), interest will be imposed according to the outstanding amount at the beginning of each calendar month; for flat-rate loans, it depends solely on the original borrowed amount. The tables below shows the difference between the two:
| Example | Monthly rest rate | Flat interest rate |
| Renovation loan of $10,000 acquired with a monthly repayment | 3% | 3% |
| Monthly instalment | $846.94 | $858.33 |
| First instalment made against the principal | $821.94 | $833 |
| First instalment made against the interest | $25.00 | $25.00 |
Monthly rest rate
| # | Payment | Interest | Principal | Balance |
| 1 | 846.94 | 25 | 821.94 | 9,178.06 |
| 2 | 846.94 | 22.95 | 823.99 | 8,354.07 |
| 3 | 846.94 | 20.89 | 826.05 | 7,528.01 |
| 4 | 846.94 | 18.82 | 828.12 | 6,699.89 |
| 5 | 846.94 | 16.75 | 830.19 | 5,869.70 |
| 6 | 846.94 | 14.67 | 832.27 | 5,037.43 |
| 7 | 846.94 | 12.59 | 834.35 | 4,203.09 |
| 8 | 846.94 | 10.51 | 836.43 | 3,366.66 |
| 9 | 846.94 | 8.42 | 838.52 | 2,528.13 |
| 10 | 846.94 | 6.32 | 840.62 | 1,687.51 |
| 11 | 846.94 | 4.22 | 842.72 | 844.79 |
| 12 | 846.9 | 2.11 | 844.79 | 0 |
Flat interest rate
| # | Payment | Interest | Principal | Balance |
| 1 | 858.33 | 25 | 833.33 | 9,166.67 |
| 2 | 858.33 | 25 | 833.33 | 8,333.34 |
| 3 | 858.33 | 25 | 833.33 | 7,500.01 |
| 4 | 858.33 | 25 | 833.33 | 6,666.68 |
| 5 | 858.33 | 25 | 833.33 | 5,833.35 |
| 6 | 858.33 | 25 | 833.33 | 5,000.02 |
| 7 | 858.33 | 25 | 833.33 | 4,166.69 |
| 8 | 858.33 | 25 | 833.33 | 3,333.36 |
| 9 | 858.33 | 25 | 833.33 | 2,500.03 |
| 10 | 858.33 | 25 | 833.33 | 1,666.70 |
| 11 | 858.33 | 25 | 833.33 | 833.37 |
| 12 | 858.33 | 25 | 833.33 | 0.04 |
Taking note of handling and additional fees
When taking a renovation loan from a bank, you will also incur some additional charges. These include processing fees, disbursement fees, late payment fees, and cancellation fees.
Handling/Processing fees
This fee is charged as the cost of gathering information required to get a loan approved. Generally, it amounts to 1% of the loan amount.
Disbursement fees
It is charged when the loan proceeds are transferred to the renovation contractor using a cashier order.
Late payment fees
These fees are charged when the instalment payment is delayed.
Cancellation fees
It is generally 1% of the undrawn charges of the cancelled loan
Insurance premium
This is 1% of the approved loan amount that ensures that the renovation loan is repaid in case of an adverse occurrence.
Look into other bonuses or benefits
Several banks offer small to large amounts of bonuses when you take a renovation loan from them. Some banks do not charge for three initial cashier orders to renovation contractors, while others provide some discount on the processing fee if the application is made online. In some cases, if you apply for a renovation loan alongside a home loan, the lending bank provides a lower interest rate on the renovation loan.
What improvements should you make as part of a home renovation?
A home renovation loan should only be considered when you are sure that it will improve the property value or decrease the long-term cost of caring for your home.
For instance, new sidings or roof repairs are some examples of improvements that make your home more energy efficient and weatherproof.
Another thing to bear in mind is not to be in a hurry to renovate. You should get in touch with different lenders and find out their interest rates. Keep in mind that remodelling projects often ended up being time-consuming and more expensive than you may have originally thought. You must ensure that your finances can handle yet another loan.
How to apply for a Renovation loan
Once you have ensured that you meet the eligibility criteria for a renovation loan, find a contractor or interior designer to help you design the home of your dreams. When the scope of work is finalised, get a quotation from your vendor. You will need this to apply for your loan.
Once you have the quotation, gather the other documents required for your application. These include:
- Income statements (payslips / CPF statements)
- NRIC
- Quotation from the vendor
- Proof to show that you are the owner of the house
Where to apply for a renovation loan
Banks are typically the most preferred option for a renovation loan. However, banks typically take a long time to approve loan applications as they have rigorous checks in place. Licensed moneylenders can be a suitable alternative in this instance as the competitive market urges them to keep interest rates low and the approval process seamless and straightforward. Knowing the differences you can expect while borrowing from a bank and a moneylender is useful to keep in mind while considering your renovation loan.
Cash Direct’s home renovation loan is quick and hassle-free to apply for. If you’re considering upgrading your house so it finally feels like home, get in touch with us and we’ll be happy to help make your vision a reality.
