Are Home Renovation Loans a Smart Move?

This post was originally posted on Planner Bee.

Moving into a new home comes with many costs. You’ll need to cover the down payment, stamp duty, legal fees, and home insurance. If you’re newlyweds or moving into a bigger home to accommodate a growing family, you might also be paying for other large expenses, such as wedding or hospital delivery fees.

With all these costs, a renovation loan can help ease the financial burden of updating your new home. Renovations can be expensive, ranging from S$20,000 to over S$100,000, depending on the scale of work and the materials used. Upgrading a Build-to-Order flat can be costly, but revamping a resale property often costs more due to additional work like hacking, rewiring, or replacing outdated fittings.

If you have limited cash on hand, a renovation loan can be a useful option. Here’s what you need to know about how these loans work and how they can help with your finances.

What you need to know about renovation loans?

Renovation loans are short-term loans with a repayment period of up to five years. You can typically borrow up to six times your monthly salary or S$30,000, whichever is lower. These loans cover renovation work such as built-in carpentry, painting, flooring, tiling, bathroom upgrades, and electrical work. However, they can’t be used for loose furniture or anything outside of renovation. The bank will issue the approved amount directly to the contractor via cashier’s orders.

One advantage of renovation loans over personal loans is the lower interest rates. Renovation loan rates range from about 4% to 7%, while personal loan rates vary from 3.5% to 10%. However, personal loans offer more flexibility in terms of loan amount, repayment period, and usage.

If you need funds specifically for home renovation and can repay the loan within five years, a renovation loan is a good option. Do note that CPF cannot be used for repayments. Also, check that your total monthly debt—including home and car loans—stays within the Total Debt Servicing Ratio limit of 55% of your gross income.

Some banks now offer lower interest rates for “green loans” if your renovation includes sustainable features like LED lighting, ceiling fans, or solar panels. For instance, DBS’ Eco-aware Renovation Loan offers a discount if you meet six out of 10 items on its checklist, covering areas like air quality, lighting, and energy use. Maybank’s renovation loan also supports solar panel installations.

Here are some renovation loans currently available:

How to qualify for a renovation loan?

To qualify for a renovation loan in Singapore, you must be a citizen or permanent resident aged 21 to 65. Either the property owner or a close family member (such as a parent, child, spouse, or sibling) can apply, with the owner’s consent. Some banks also allow for joint applications.

Different banks have different income requirements. For example, the minimum annual income for the main applicant ranges from S$24,000 at DBS/POSB to S$30,000 at Maybank.

Can a renovation loan help you save money?

Hypothetically, let’s say your renovation costs S$25,000, and you take a renovation loan with a 3.88% interest rate over five years. You would end up repaying S$29,850 in total, or about S$497.50 per month.

This could be beneficial if, instead of paying S$25,000 upfront, you invest that money in something with a higher return. For example, CPF’s Special Account offers a 4% interest rate with compounding interest. If your investment grows more than the loan interest, you could come out ahead.

However, if your cash flow is already tight, a renovation loan might simply be a practical way to avoid higher-interest debt from other sources.

Another factor to consider is whether it makes more sense to use your savings or sell investments instead. If you have spare cash that isn’t invested or your investments aren’t expected to earn more than the loan interest, paying upfront might help you avoid unnecessary borrowing costs.

Read more: How To Save on Your Home Renovation?

Renovation loans vs personal loans

Renovation loans usually have lower interest rates than personal loans. However, banks sometimes offer promotions on personal loans that could make them a better deal. For example, HSBC’s Personal Loan currently has a promotional interest rate of 2.92%, plus up to 2.5% cashback.

Personal loans also offer more flexibility. You can use them to buy loose furniture, which might be important for your home makeover. There are also more personal loans available, while renovation loans are offered by fewer lenders and often only to those with existing home loans.

Pro tip: If you’re comparing mortgage loan rates, we can help match you with the best options for your needs.

Choosing the right loan

A renovation loan can be helpful if you have multiple expenses to manage. It lets you spread out your payments, so you can prioritise other financial needs. Using the Planner Bee’s mortgage calculator can also help you estimate your mortgage payments and decide if a renovation loan makes sense for you.

These loans can also free up cash for other goals, such as investing earlier. If it helps you manage your finances more comfortably while designing your dream home, a renovation loan could be a good option.