Found the property you want to buy? Great! But what if your existing property doesn’t sell as quickly as you expect it to? On top of that, you need to pay for the down payment of the new home soon.
A bridging loan is one of the mainstream options used by many homebuyers to help them make a house purchase. But aside from that, you can also consider taking up a home equity line of credit (HELOC). These two are short-term financing to facilitate buying a property.
But how do these financing options differ? A bridge loan is typically used during the process of purchasing a new home while selling your current home. A HELOC, on the other hand, can have different uses. Want to learn more?
Differences Between a Bridge Loan and a HELOC
Bridge loans and home equity lines of credit (HELOCs) are similar in that they are both short-term financing that uses your property’s equity for approval. Additionally, both are used by homebuyers in the real estate market to purchase their new property.
Before we dive deeper into how each financing can help you, here are several differences between the two.
Specific to the fees and down payment related to purchasing a new home while trying to sell your current property
Have flexibility in the use of funds and can be used for any purpose, such as home renovations.
Up to 6 months of loan tenure
Borrowers may have several years, averaging about 10 years
Provides a lump sum amount to the borrower to cover the home down payment
Works like a credit card wherein the borrower is given a revolving credit with a set limit.
Interest rates are charged on the full principal loan amount
Interest rates are only charged on funds used from the credit line
Deciding which short-term financing to use will depend on several factors as well as other considerations. That said, you need to analyze which financing option will be most beneficial to you.
What Is a Bridge Loan?
A bridge loan is a short-term, high-interest financial product that homebuyers can use to cover the cost of a home purchase. For instance, if you’re looking to buy a new property before selling your existing home, you can use the loan amount to pay for the home down payment.
With this type of loan, banks and other financial institutions offer repayment terms of up to 6 months. Additionally, bridge loans typically have interest rates that range between 5% and 6%.
When To Use Bridge Loans?
Bridge loans are typically used when you need to pay the down payment of your new home while waiting for the sales proceeds of your existing property. You can use part of the loan amount for other expenses, such as the closing costs.
A bridge loan is a good option if you:
- Have found a new property and are in a real estate market where the houses sell quickly
- Want to purchase a property but the seller is not willing to wait for the sale of your current home
- Don’t have enough CPF savings or cash to pay for the home down payment
- Have funds tied to your old property.
- Want to quickly close on a new home before selling your old property
Bridge Loan Costs
Compared to a standard home loan, bridge loans have higher interest rates. It’s typically around 5% to 6% p.a., depending on the bank.
Here’s an illustration:
Let’s assume that you are selling your existing property to purchase a new HDB flat worth S$1,000,000. However, your sales proceeds will be available after 5 months.
5% x S$1,000,000 = S$50,000
(20% cash and/or CPF funds)
20% x S$1,000,000 = S$200,000
(Assuming you qualify for maximum 75% Loan-to-Value)
75% x S$1,000,000 = S$750,00
To pay for the next downpayment (20%), you took up a bridge loan worth S$200,000. Assuming the bank charges a 6% interest rate and you have a 6-month tenure, you will incur a total interest of S$6,000.
On top of paying the interest on the bridge loan, you may also need to pay the following fees to close the property transaction:
- Closing costs
- Appraisal fee
- Administrative fee
- Notary fee
Types of Bridge Loans
- Capitalised Interest Bridging Loan: With this bridge loan, the bank will pay for the entire purchase of your new property. As such, your mortgage repayments will commence once your old property is sold. This is a good option if you don’t want to pay for two loans simultaneously.
- Simultaneous Payment Bridging Loan: This option involves paying off the home loan of your new property and the bridge loan simultaneously. On top of that, you also have less than 12 months to sell your existing one and commence your loan repayment.
Note that these types of bridge loans are not available when you take up a bridge loan from licensed money lenders in Singapore.
Pros and Cons of Bridge Loans
- Convenient home purchase. No need to wait for your existing property to sell before you can close the property purchase.
- Flexible repayments. Some bridge loan lenders allow you to pay your principal loan amount and then the interest afterward.
- Makes your new home affordable. You can afford to pay the home down payment while waiting for the sales proceeds of your new property.
- Avoid renting. Live in your new property while you wait for your existing property to sell.
- Risk of property devaluation. If the real estate market devalues your existing property, you might end up paying for a larger repayment plus interest on your bridge loan.
- Overwhelming loan repayments. When you take up a bridging loan on top of your mortgage, then you’ll have to pay for two loan charges and two interest rates.
- High interest. Monthly payments can be high and if it takes longer to sell your property, you’ll be paying higher interest.
- Termination fees. If you switch from bridge loans to home loans before your bridge loan term ends, you may have to pay early repayment or termination fees.
What Is a HELOC?
A home equity line of credit or HELOC is a short-term financial product that allows you to tap into the equity of your home. You can withdraw as much as your approved credit line, pay it off, and withdraw funds again – much like how you would use a credit card.
When To Use a HELOC
With a bridge loan, you’re limited to using the funds for the process of purchasing a home, such as the down payment and necessary fees. A HELOC, on the other hand, can be used for different reasons, such as home renovations and education expenses. Here are other uses of a HELOC:
- Downpayment on a second property
- Paying off debt
- Paying medical bills or long-term care expenses
- Emergency expenses
A home equity line of credit (HELOC) is a credit line secured by your property. Since it is a secured loan, the interest rate is lower as compared to bridging loans.
The limit set on the account will depend on your request and be subject to LTV.
Consider this illustration:
After deducting the loan balance, you will be left with S$75,000. This will be the credit limit on your HELOC.
Pros and Cons of HELOCs
- Lower interest rates
- Offer flexibility in terms of how you spend the funds
- You may end up borrowing more funds in total as long as you pay in full at the end of the billing period
- Your home is put up as collateral
- Come with variable interest rates that can increase or decrease
- They’re essentially like a credit card so it requires a lot of discipline
Tips When Taking a Short-Term Financing
Short-term financing entails more risks. For one, you’ll face higher interest rates. Plus, you’ll also pay significant monthly payments. That said, it’s best to consider a few factors before taking up a short-term loan.
1. Have a Plan For Repayment
Before you take up any home equity loan, make sure that you can afford the monthly repayments.
Note that bridge loans can be flexible. Some banks or lenders may require payment at the end of the bridge loan instead of monthly repayments. This means you’ll have to pay for the bridge loan principal amount and all the accumulated interest when your existing property is sold.
2. Determine Where You’re Going To Use the Loan Amount
It is important to know exactly how you’re going to use the borrowed money. Additionally, plan a steady cash flow to pay off the monthly repayments. For instance, if you’re going to use the bridge loan for the down payment, make sure to use the sales proceeds of your old home to pay off the loan.
3. Decide On a Loan Amount
Bridge loans from banks generally finance up to 25% of your new property’s purchase price. A licensed money lender in Singapore, on the other hand, can provide you up to 6x your monthly salary.
If you want more options throughout the draw period, then you can consider HELOC since funds are available on an ongoing basis. This means you have a credit limit – similar to a credit card. Additionally, you’ll only be charged interest on the amount you have withdrawn.
4. Compare Interest Rates
Short-term financing is notorious for being expensive loans. Bridging loans, for instance, have an interest rate ranging between 5% to 6% p.a. So compare different bridging loan packages to find the lowest interest rate that will suit your needs and repayment capacity.
Depending on the bridge loan lender, you can start with the interest payments first and then pay off the bridge loan once you’ve received your sales proceeds on the old property.
5. Loan Tenure
Aside from high interest rates, short-term loans also have shorter loan tenure – typically less than 12 months. With bridging loans, you generally have up to 6 months to repay the loan.
How To Apply
The requirements may vary depending on the bank or financial institution you’re borrowing from. Here are some of the basic requirements:
- Between 21 to 65 years old
- Singapore Citizens, Permanent Residents, and Foreigners
- Buying another flat from the HDB resale market or directly from the HDB
- All owners of the flat sold must be the borrower
- Option to Purchase (OTP) document
- CPF withdrawal statements
- Outstanding bank loan statements
How To Apply For Bridging Loans From Money Lenders
- At least 18 years old
- Must exercise the Option to Purchase (OTP)
- Minimum Income:
- Singaporeans or Permanent Residents: S$1,500
- Foreigners: S$2,000
- A copy of your NRIC
- Copy of the OTP
- Proof of income and employment
- Proof of residence
- SingPass to log in to CPF, IRAS, and HDB websites
Choosing between taking up a bridge loan or a HELOC depends on your personal preferences and your ability to repay the loan. If you’re looking for a large lump sum of money to pay the home down payment, you may want to consider a bridge loan.
- Bridge loans and home equity lines of credit (HELOCs) are similar in that they are both short-term financing that uses your property’s equity for approval.
- A bridge loan is typically used during the process of purchasing a new home while selling your current home.
- A HELOC, on the other hand, can have different uses, such as for home renovation, paying off your mortgage, or paying back medical debt.
Want to find the best loan package for your needs? Request up to three loan quotes at Loan Advisor today to find the lowest interest rates from top licensed money lenders in Singapore. A one-stop loan comparison platform, Loan Advisor offers free, unbiased, up-to-date information to help you make a smart financial decision.