Pledging and Unpledging: How They Can Boost Your Borrowing Capacity ?

Ever feel like you’re ready to upgrade your living situation, but may not get a big enough home loan to buy that dream home? Even if you’re making a decent living, Singapore’s Loan-toValue (LTV) limits and Total Debt Servicing Ratio (TDSR) rules can still present hurdles to prevent you from securing the desired mortgage. This frustration is real, especially for young professionals or those buying high-value properties.Thankfully, the asset pledging and unpledging strategies offer powerful, yet often underutilised solutions for home buyers to drastically improve their borrowing capacity. Let’s dive into how this smart money move can make your property dreams a reality.
How Pledging and Unpledging Boost Your Borrowing Capacity

How Pledging and Unpledging Boost Your Borrowing Capacity?

The strategy of asset pledging and unpledging leverages your liquid wealth to satisfy a bank’s credit assessment, particularly the TDSR limit. These two methods use your funds differently to achieve the same goal: maximising your loan amount.

Pledging – Secure a Larger Home Loan With Collateral

Pledging simply means locking up a cash deposit with a bank for a minimum period of 48 months as collateral to secure a larger home loan than what you’d qualify for with your regular income. You may also pledge other types of assets such as bonds, unit trusts, and listed company shares.

This is an extremely effective strategy because lending institutions usually recognise the full value (100%) of the pledged deposit, offering you better negotiation power and a higher boost to the loan quantum. For example, if you need S$1,000 per month income to qualify for a home loan, you need to pledge S$48,000 (S$1,000 x 48 months). The bank will take into consideration the full value of the pledged amount.

Unpledging – Show Funds as Evidence of Assets

Unpledging, sometimes called "show cash", is a more flexible method whereby you show the bank you have a substantial amount of financial assets. You can present your bank account or investment accounts as proof during the loan application and just before loan disbursement.Unlike pledging, there is no lock-in period, hence giving you high flexibility to use the funds for other investments immediately after loan disbursement.

However, this strategy requires a much higher amount to secure a larger loan sum since you’re not locking in your funds with the bank. Typically, a bank will apply at least 70% "haircut", meaning only up to 30% of the funds you show will be recognised as income. Using the earlier example, if you need S$1,000 per month income to qualify for a loan, using the unpledging method would mean that you’ll need to show S$160,000 (S$1000 x 48 months/ 0.3) to the bank.

Key Differences Between Pledging and Unpledging

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Pledging in Action - Sally’s S$1.7 Million Home

Here’s a real-life example of how pledging offers a practical solution. Sally, a 25-year-old client, was planning to buy a 3-bedroom condominium at S$1.7 million.

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The Pledging Solution:

Sally decided to explore the pledging and unpledging strategies using cash reserves borrowed from her parents:

  • Option 1 (Pledging):

    She needed to pledge S$257,000 to the bank as collateral for 4 years.

  • Option 2 (Unpledging):

    She would need to show S$854,000 to the bank during the home loan application and during loan disbursement.

By using either method, Sally was able to acquire the S$1.7 million home and reduced the cash payment from S$1,047,600 to S$729,600, about 30 % less upfront cash!