Have you found the property you want to buy? Great! But what if your existing property doesn’t sell as quickly as expected? On top of that, you need to pay for the down payment on 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).
A bridge loan is typically used to purchase a new home while selling your current home. A HELOC, on the other hand, can have different uses.
Loan Advisor, a reliable loan comparison site in Singapore, explores the differences and drawbacks of these two options, helping you find the ideal path to your dream home.
Bridge Loan Vs. HELOC: At a Glance
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 type of financing can help you, here are several differences between the two, according to the finance website The Balance.
Purchase a new home while selling current home
Utilize funds for any purpose
Short-term, usually one year or less
Long-term, averaging about 10 years
Lump-sum amount for home expenses
Revolving credit, similar to a credit card
Charged on the full loan amount
Charged only on funds used from the credit line
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’s down payment.
So how much can you borrow? The loan-to-value ratio (LTV) is a specific amount determined by the Monetary Authority of Singapore, dictating the maximum borrowing limit to finance your home or property purchase. Banks adhere to a 75% LTV, whereas HDB permits an LTV of 85%.
Banks and other financial institutions offer repayment terms of up to 6 months with this type of loan. 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 on your new home while waiting for the sale proceeds of your existing property. You can use part of the loan amount for other expenses, such as 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 or example scenario:
Let’s assume that you are selling your existing property to purchase a new HDB flat worth $1,000,000. However, your sales proceeds will be available after 5 months.
5% x $1,000,000 = $50,000
(20% cash and/or CPF funds)
20% x $1,000,000 = $200,000
(Assuming you qualify for maximum 75% Loan-to-Value)
75% x $1,000,000 = $750,00
To pay for the next down payment (20%), you took out a bridge loan worth $200,000. Assuming the bank charges a 6% interest rate and you have a 6-month tenure, you will incur a total interest of $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
Capitalized 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 on 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
Bridging Loan Advantages
- Convenient home purchase. There is no need to wait for your existing property to sell before you can close on 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 sale proceeds of your new property.
- Avoid renting. Live in your new property while you wait for your existing property to sell.
Bridging Loan Disadvantages
- Risk of property devaluation. If the real estate market devalues your existing property, you might end up paying a larger repayment plus interest on your bridge loan.
- Overwhelming loan repayments. When you take out a bridging loan on top of your mortgage, you’ll have to pay 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 Home Equity Loans (HELOC)?
A home equity line of credit, or HELOC, is a short-term financial product that allows you to tap into your home’s equity. You can withdraw as much as your approved credit line, pay it off, and withdraw funds again, much like using a credit card.
In accordance with the law, the maximum amount you can borrow through a home equity loan is either 75% of your property’s value or the amount calculated using the formula provided, whichever is lower:
Maximum Loan Amount = Property Value – Outstanding Loan Amount – CPF Monies Used
By capping the loan at 75% of your property’s value, banks create a safety margin to guard against a drop in your property’s value below the loan amount.
See Also: Is a Home Equity Loan Right for You?
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:
- Down Payment 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 or example scenario:
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 For Borrowing Either of the Loans
Short-term financing comes with higher risks, including higher interest rates and significant monthly payments. Before opting for a short-term loan, consider these essential factors:
Have a Repayment Plan: Ensure you can afford the monthly repayments before taking a home equity loan. Bridge loans may offer flexibility, with some lenders requiring payment at the loan’s end instead of monthly installments.
Know Your Loan Purpose: Have a clear plan for the borrowed money. If using a bridge loan for a down payment, ensure you use the sales proceeds from your old home to repay the loan.
Decide on Loan Amount: Banks may finance up to 25% of the new property’s purchase price, while licensed money lenders might offer up to 6x your monthly salary. HELOCs provide ongoing funds with a credit limit, charging interest only on the withdrawn amount.
Compare Interest Rates: Short-term loans often have higher interest rates. Compare different bridging loan packages to find the most suitable option for your needs and repayment capacity.
Consider Loan Tenure: Short-term loans typically have shorter tenures, often less than 12 months. Bridge loans usually offer up to 6 months of repayment.
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’s 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 home 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, and up-to-date information to help you make a smart financial decision.