Property
Renovation Loan
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A renovation is simply a term loan offered by a lender to provide financing for homeowners to undertake remodeling projects on their homes.
In this respect, it is not that much different from personal loans and credit card draw downs.
But the issue is that personal loan quantums and credit limits are often not high enough to financing renovation projects that can easily run into tens of thousands of dollars.
While personal loans and credit cards for example, determine limits based on a multiple of the monthly income, renovation loans are based on a multiple of the annual income up to a borrowing ceiling stipulated by the bank.
Credit cards also charge interest rates that are reputed to induce mental breakdowns onto consumers.
A huge number of new homeowners in Singapore actually spend more money on renovations than the cash portion of their down payments to buy the property!
That’s a number that any lender would scuff at when a borrower is making an average income.
What’s unique with renovation loans is that the funding issued would be used to make improvements on a property which can often increase it’s market value ever so slightly.
And in an ideal scenario, while the loan used for renovating would be paid to a contractor, the homeowner can get it back from the increase in home equity.
The lender would bank in the profits, and the relationship would result in a win-win-win situation.
How do renovation loans work?
Lenders see renovation loans as low risk products to sell as a borrower would have a property in his name, which is a valuable asset in Singapore.
As the borrower would be required to provide a personal guarantee, defaulting on the loan would put his new house at risk within the first year of moving in.
That really inauspicious!
This is why banks love the idea of borrowers getting their home loans with them together with the renovation loan.
Other than the reason of profit generating, being the owner of both these debts give the lender more leverage should things go wrong financially for the homeowner.
Costs of renovation loans
This preferred position of being the lender of both loans is why a bank would often offer a discount on their renovation loans to customers who are already their home loan customers.
But even without special rates or promotional rates, interest rates for home renovation loans are generally low compared to other types of consumer credit and loan products.
This is partly because unlike a personal loan which the borrower can use the funds for any purposes he wants, a renovation loan would be used towards payment for home improvements… which can increase home equity as previously mentioned.
With a loan tenure of up to 5 years, the costs of renovation loans are not limited to interest charges.
There can sometimes be a multitude of administrative charges charged to the borrower, and directly deducted from the loan funds, resulting in a lower disbursement amount. This implies that it can also affect amount financed.
There’s even the possibility of the bank charging a fee for every different contractor to pay, and every payment made even if it’s the same contractor.
These charges can sometimes seem like an insignificant amount in dollars. But when you convert them into percentage against the loan amount, you might be in for a huge surprise.
To protect themselves from losses, the bank would also levy a mandatory insurance charge so that they can ensure that they would be paid in the event that the borrower dies prematurely or suffers total permanent disability.
As you can see, the expenses associated with renovation loans are not something one would consider negligible.
Enforcement
To ensure that the funds borrowed are used towards improvements, a cheque payment (or cashier’s order) to the interior designer or contractor would be written upon loan approval and disbursed to the recipient upon the achievement of certain milestones.
An official quotation or invoice from the builder, contractor or interior designer would also be required upon the application of the renovation loan.
This is so that the lender would know exactly how much money is needed to finance the renovation works.
Make no mistake about it. The bank is serious when it comes to the usage of funds.
This is why they would only approve financing according to a list of their approved activities.
These can include:
- Built-in fixtures like cabinets
- Paint work
- Electrical works
- Flooring works
- Toilet renovation
- etc
As different lenders would have different rules of their loans, it is best that you check with your lender about their approved activities.
And if you are wondering, buying furniture and electrical appliances are not financed for renovation loans.
At least you can still buy them on installments from big retailers.
Finally, remember to obtain quotations from at least 3 different contractors so that you can source for one that provides the most value for your buck.
Just because you can get a loan for construction works easily approved doesn’t mean that you don’t need to spend wisely.
Renovation loan fraud
It doesn’t take a genius to realize that the process of renovation loan approvals can be subject to abuse and fraud by unethical players.
The easiest loophole that anyone with half a brain would observe is that contractors overstating the costs of materials and their services can easily inflate the quotation and thereby, a higher loan amount.
For example, a contract costing $30,000 is quoted at $50,000. When the loan funds are received for $50,000, the contractor keeps $30,000 and sends the balance of $20,000 to the borrower who might need it for cash flow.
This problem is compounded when any grown adult would probably have at least one friend who is in the renovation business.
This goes back to why banks would want to hold the debt of both the housing loan and renovation loan of a borrower. So that they have more leverage over the borrower and he would think twice before entertaining such unhealthy thoughts in his mind.
Just a word of warning that banks are known to come down hard on fraudulent activities so as to deter similar activities in the future from new customers.
So do play within the rules.
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