Financing home renovations

“Oh, I would love to live in an ugly house!” said no homeowner ever. Home renovations might be taxing but they are a vital part of our lives. Now that you have got your dream home after a few trips to the bank, it’s time to start thinking about financing the home renovation because frankly, a house isn’t a home until renovated as per your preferences.

So, how do you finance home renovations? There are two ways: home renovation loans and personal loans. Both have their advantages and disadvantages.

Long story short, home renovation loans are better than personal loans in most cases. You cannot go wrong with these. Though you have to keep all the terms and conditions in mind.

Let’s understand what home renovation loans are and how they work before we compare the two types of loans to find out which type has better suitability for your home renovation needs.

What is a home renovation loan?

A home renovation loan is meant specifically to fund home renovations. These are special loans offered by banks. The loan repayment term of a home renovation loan is 5 years in Singapore. You cannot get a longer one than that. Also, the maximum loan amount you can apply for is capped at S$30,000 or six years’ worth of your salary – whichever is lower.

There are two packages offered by banks:

  1. Fixed-rate home renovation loans: These loans have a fixed or flat rate. This interest will be calculated on the total principal amount.
  2. Monthly rest home renovation loans: These loans calculate the interest on the remaining or outstanding amount. As you pay the loan down, you will be paying an ever-decreasing amount of interest.

Which one is better? Well, if you can make your payments on time and even pay more upfront then it makes sense to go for a monthly rest home renovation loan. On the other hand, fixed-rate loans are usually more affordable in general.

With that out of the way, now it is time to see which type of loan is better – a home renovation loan or a personal loan.

Home renovation loans vs. personal loans: pros and cons

Common sense would dictate that the home renovation loans are better for home renovations. But under certain circumstances, you will see that personal loans might be a better way out. Let’s do a quick comparison to determine which one will be better for you.

  1. Interest rates: Home renovation loans have a lower interest rate. It ranges from 3% to 4%. Personal loan interest rates range from 3.5% to 11%.
  2. How much can you borrow: The principal amount is usually lower in a home renovation loan. It’s capped at S$30,000 or six years’ worth of your annual salary. Personal loans have a higher cap. You can borrow 8 to 10 times your salary if you earn S$120,000 annually or more. This differs from bank to bank.
  3. Repayment duration: You have to repay home renovation loans sooner. These come with a 5-year repayment term. Personal loans can have a repayment tenor of up to 7 years. Again, this differs from bank to bank.
  4. Paperwork: More paperwork is required in the case of a home renovation loan. You need a renovation contract or a formal quotation from a contractor apart from income documents and proof of ownership. On the other hand, personal loans involve less paperwork. All you need in this case are your last three month’s payslips (computerized).
  5. Processing fees: Home renovation loans come with a lower processing fee of 0% to 1% and an admin fee of 0% to 1.5%. Personal loans have a processing fee in the range of 1-3% whereas the admin fee varies from bank to bank.
  6. Usage: Home renovation loans can strictly only be used for home renovations such as floor retiling, structural alterations, wall paint, building cabinets, and so on. Personal loans are much more flexible as you can use this money for anything.
  7. Disbursements: Note that, unlike a personal loan, you will not be able to cash out the money and use it on your own expenses in a home renovation loan. The loan amounts are not disbursed to your name. They are made in the name of the contractor whose quotation you provided.
  8. Availability: Last but not the least, in contrast to personal loans that are provided by all banks, only a handful provide home renovation loans. These are POSB, OCBC, and DBS.

Carefully go over all these aspects. Most likely a home renovation loan will be ideal. But it’s possible that a personal loan might work better for you.

We recommend home renovation loans because although they come with limitations such as a lower cap, stricter usage, and more documentation – they are always a better way to renovate your home. Personal loans might urge you to do unnecessary changes and alterations whereas a home renovation loan is chalked up seeing exactly what changes you need in your home.

This keeps overall costs low by stopping you from overspending on things you don’t really need. The lower interest rates and processing fees also help.

Things to look out for when going for a home renovation loan

Assuming you’re sold to home renovation loans, here’s what you should know before you approach a bank for one.

Eligibility

Here are the eligibility criteria to apply for a home renovation loan with any of the three banks:

  1. Only permanent residents or Singaporeans can apply.
  2. Age needs to be between 21 and 55.
  3. Annual income must be at least S$24,000.
  4. The credit score of the debtor must be in good standing.
  5. If there’s a joint applicant, they can only be a spouse, parent, child, or sibling of the main applicant.
  6. The property must be owned by either the main applicant or the joint applicant.

Usage

As mentioned above, a home renovation loan has strict regulations on what it can be used for. Here are the things you can use the loan for:

  • Basic bathroom fittings
  • External works (as long as it’s within the compound of the house)
  • Electrical and wiring work
  • Flooring and tiling
  • Structural alterations
  • Built-in cabinets
  • Redecorating (such as wallpapers)
  • Painting

You cannot use a home renovation loan to buy household appliances, home entertainment systems, washing machines, refrigerators, or ACs. You also cannot use the loan to purchase curtains or invest in furnishings.

Interest calculation

Don’t be sold to promotional offers. Always do complete research and calculation on the total amount you will be paying as interest. For example, banks usually run offers such as fee waivers and discounted interests for a time period. These surely make the loan more attractive but you must first calculate the full amount you will end up paying and compare between packages using this metric and other perks.

Know your loan

There are many important aspects to a home renovation loan that you should not skip on. A couple of those include:

  1. Minimum loan amounts: OCBC’s home renovation loan has a minimum loan quantum of S$5,000. Others require you to borrow at least S$10,000.
  2. Other fees: Apart from processing fees and admin fees, you should also check what the late payment fees and insurance fees are.

Applying for a home renovation loan – step by step

Applying for a home renovation loan is a three-step process. We’re assuming you have already selected the loan you wish to go for. Great job! Now, let’s see how you will apply for it.

Step #1: Quotation

Home renovation loans work on quotations. Interior designers and contractors can give you quotations on what will it cost to renovate the home after listening to your requirements and wants.

Consider getting quotations from multiple vendors. It’s a good practice in general, not specifically for applying for a home renovation loan.

Step #2: Documentation

Once you have the quotation ready you now need to prepare the documentation. NRIC, your latest IRAS Notice of Assessment, invoice, Proof of Home Ownership, and income statements will be required.

You should also read the bank’s website and policies on the required paperwork just to be in the clear.

Step #3: Application

The application can be made at a branch, over the phone, or online. Submit the documents to the bank after having an initial conversation and the bank will get back to you with a letter.

The loan processing time differs from bank to bank. You might need to wait a week or more in some cases to receive the loan. Once you receive the disbursements, your contractor can then cash out and use the money. Renovation work can now begin!

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