Personal Loan Vs. Renovation Loan: What You Need to Know

Renovating your home is a significant undertaking, particularly in Singapore where 31.3% of homes are 4-room resale HDB flats and the average renovation cost is S$45,600. 

Homeowners face a crucial decision on financing options: the flexibility of a personal loan or the often cheaper, tailored approach of a renovation loan. 

Personal loans provide broad coverage including materials and labor, while renovation loans are specific to home improvements but can be restrictive. 

Choosing the right option requires a thorough understanding of each, tailored to your financial and personal needs. 

This article explores both to help you decide on your renovation.

Understanding Renovation Costs in Singapore

Renovating a Build-To-Order (BTO) flat in Singapore can be a substantial financial undertaking. Here’s what you can expect:

These figures, provided by Qanvast, give you a ballpark of potential expenses but remember, your final tab depends on various factors.

Factors Affecting Your Renovation Budget

• Size Matters: It’s intuitive — larger flats require more materials and labor, pushing up the price.
• The Renovation Team: Who you hire makes a difference. Established interior designers and renovation contractors may command higher fees compared than new entrants.
• Materials Used: From luxe granite countertops to economical laminate flooring, the materials you choose will have a direct impact on your wallet.
• Scope of Work: Are we talking a full makeover or just a fresh coat of paint? The extent of renovation is a significant cost determinant. Note that certain renovation activities can dramatically inflate your costs:
  • Carpentry: Custom carpentry for kitchen cabinets and entertainment units is a common price-hike culprit.
  • Hacking: The removal of tiles, walls, or built-ins requires not just manpower but also fees for disposal.
  • Masonry: Underlying work like subfloor layers for tiling can be quite expensive.
  • Disposal of Unwanted Materials

Renovation Loan vs. Personal Loan: An Overview

Comparative Analysis

In Singapore, renovation loans offer 3-4% rates with interest that decreases over time, suited for budget-savvy homeowners. Personal loans, while pricier with fixed rates, provide flexible spending for various needs. Choose based on your cost priorities and repayment capacity.

What Is a Renovation Loan?

One of the best ways you can fund your home renovation is by taking a renovation loan in Singapore. Banks such as DBS, Maybank, and POSB offer this, although the terms and conditions vary. 

Flexibility in Use of Funds:

Renovation loans come with a playbook of rules. These funds are strictly for renovation-related expenses. 

• Paying contractors
• Purchasing materials
• Painting and tiling works
• Structural repairs and improvements
• Specific home improvements. 

Note that there’s no room for a freestyle spend here; the loan is designed to ensure every dollar goes into adding value to your home.

Features:

With a renovation loan, you can borrow up to $30,000 or at least six times your monthly salary is but this might not be enough to cover your full cost. If this is the case, you will have to pay the excess out of pocket. 

However, the good thing about getting a renovation loan is that it is very specific, and banks view this as lower risk and can let you borrow at a lower interest rate. Try getting an invoice from your home renovation vendors to increase your chances of getting your home renovation loan approved. 

Interest Rates and Repayment Terms

Home renovation loans typically hover at a slightly higher rate than personal loans, ranging from 4% to 6.53%. The interest is calculated on the outstanding balance of the loan, which means as you pay off the principal amount, the interest calculated decreases accordingly. This results in the monthly interest payment reducing over time as you continue to pay off the loan.

Renovation loans often offer a repayment period extending up to 5 years.

Consider this illustration:

Mr. Ma receives a home renovation quotation totaling S$30,000. He decides to take out a home renovation loan with a 5-year tenure. The bank offers him an interest rate of 5.88% per annum on a monthly rest basis.

(source: DBS)

Using the DBS Home Renovation Loan Calculator, Mr. Ma’s monthly repayment for his S$30,000 renovation loan over 5 years starts at S$578.31 with a 5.88% interest rate. Initially, a larger portion of his payment is applied toward the interest, but as the principal is reduced over time, the interest portion decreases, which means more of his monthly payment goes toward paying down the principal. This results in the monthly repayment amount effectively decreasing over the 5-year period.

Pros:

• Lower total interest rate
• The chances of getting approved are higher

Cons:

• Can only be used for renovation-related works
• The maximum loan cap is $30,000
• You need to present proof of home ownership
• You need to earn at least $24,000 a year
• A limited number of banks offer this type of loan

Eligibility Criteria

• Age: Typically between 21 and 65 years of age
• Income requirements: Approximately S$30,000 (income requirement may vary per bank)
• Need to be the homeowner or be a family member residing in the house

The borrowing limit is capped at S$30,000 or six times the borrower’s monthly income, whichever is lower. If two borrowers apply jointly, this ceiling does not increase; it remains at S$30,000.

Application Process and Paperwork

As previously mentioned, renovation loans are used strictly for a home renovation project. That said, expect to submit contractor quotes, renovation contracts, and even your HDB or property floor plan. Lenders want proof that the funds are indeed for renovations. The upside? It’s a focused process, ensuring your funds are sanctioned for the intended purpose.

Consider this list of document requirements from DBS Home Renovation Loan

• Scanned / Digital Signed Copy of Renovation Quotation or Invoice 
• Income Documents, such as latest 3 month’s computerised payslip or lates 2 years of Income Tax Notice of Assessment for self employed.
• Proof of Ownership of Property (Not required for property under DBS/POSB Home Loan)
• HDB or MCST Renovation Permit (For applicants who are owners of the appointed contractor) 

What Is A Personal Loan?

Another loan you can take out when trying to build your dream home is a Singapore personal loan. Simply put, it’s borrowing money with the intent to use it for your gain. 

Flexibility in Use of Funds:

Personal loans are less stringent. It doesn’t have a set boundary on how you use the money. Need to buy new furniture, appliances, or even cover unexpected expenses during the renovation? A personal loan is the perfect choice. This freedom makes it a practical option for those who appreciate a financial buffer in the face of renovation’s unpredictable nature.

Choosing between a renovation loan’s strict guidelines or a personal loan’s flexible spending power boils down to your specific needs and financial discipline. Remember, with great flexibility comes great responsibility.

Interest Rates and Repayment Terms

Personal loans tend to have friendlier interest rates, usually fixed between 3.48% to 5.43%. The interest is calculated based on the original loan amount, not on the remaining balance. This means that even as you pay off the principal, the monthly interest payment remains the same throughout the tenure of the loan because it’s calculated on the full original amount borrowed.

Most personal loans can stretch it a bit further, with terms up to 7 years.

Using the same example above:

Mr. Ma decided to consider taking out a personal loan with a 5-year tenure for his home renovation amounting to S$30,000. The bank offers him an interest rate of 2.88% per annum. 

Using the DBS Personal Loan Calculator, his monthly repayment will be S$572.

Features:

Typically, Singaporeans can loan up to 8 to 10 times their monthly salary if you earn at least $120,000 a year, four times your monthly salary if you earn between $30,000 and $120,000 a year, and two times your monthly salary if you earn $20,000 to $30,000 a year. 

A good thing about getting a personal loan for home is that it requires no collateral. However, one drawback of getting a personal loan is that banks usually charge a higher interest rate. Since the interest rates for personal loans are computed based on your credit and income profile, there is still a chance you may get a lower interest rate if your scores are good.

Pros:

• The higher maximum loan cap
• Can be used for anything
• No collateral required
• All banks offer this type of loan
• Lower minimum income requirement

Cons:

• Higher interest rate
• Flat rate interest

Eligibility Criteria

• Age: Typically between 21 and 65 years of age
• Income requirements: Approximately S$20,000 (income requirement may vary per bank)
• Do not need to be the homeowner to qualify for the loan

Personal loans are usually based on a multiple of your monthly salary, often up to four times the individual’s monthly income. Since personal loan limits apply per individual, a couple could each apply for a personal loan, potentially doubling the total amount they could borrow for renovations compared to a joint renovation loan.

Application Process and Paperwork

Personal loans, on the other hand, tend to ask for less when it comes to paperwork specifically related to the use of funds. Standard requirements typically include (Standard Chartered CashOne Personal Loan):

• Copy of NRIC
• Proof of income, such as latest computerised payslip
• Good credit rating

Since these loans are not confined to renovation purposes, there’s no need to show renovation plans or quotes.

Conclusion

Choosing between a renovation loan and a personal loan in Singapore hinges on financial strategy. Renovation loans are budget-friendly for home upgrades with lower interest and reduced payments over time. Personal loans offer flexibility with a fixed repayment plan, ideal for various unexpected expenses. Decide based on the right mix of affordability, flexibility, and your renovation needs.

Key Takeaways:

• Renovation loans offer lower rates for home improvements with a cap at S$30,000​​.
• Personal loans provide versatile funding for any expense, potentially allowing higher borrowing limits​​.
• Renovation loans decrease monthly interest over time, whereas personal loans have fixed rates and longer terms​​.

Ready to turn your house into a dream home but not sure which loan to lean on? Compare your options with ease! Instant Loan will help find the perfect match for your renovation plans and budget. Request up to three loan quotes today!