There comes a time when your existing property just doesn’t cut it anymore, which means you might be due for an upgrade. The problem that poses is: where are you going to get the money to pay for your new property?
There are two options available to you when you want to get a new house: first would be using a personal loan to supplement your own funds and sales proceeds from your old house to purchase a new property, or you could use a bridging loan as you sell your old property.
Before you choose between a bridging loan and a personal loan, it’s good to review what they exactly are.
Personal Loan Vs. Bridging Loan: What Are They?
A Personal Loan is just what you would expect: it’s a number of financial instalments which an individual takes up, typically over two to five years, to fund expenditure, in this case, the new property’s purchase price. All of the accrued interest is paid off at the end of the loan repayment period, and the original sum (called the ‘principal’) is also returned.
A personal loan, as per its namesake, can be used for any personal purchase, which is why it can help cover your next property purchase.
Bridging Loans (Bridge Loans)
A Bridging Loan (also called a Bridge Loan) is a short-term loan intended as a way to bridge the gap between selling an old property and purchasing a new one.
A bridging loan or bridge loan allows you to use the equity of your existing home for paying off a new property. A bridging loan essentially covers the new home’s purchase price for the meantime until you complete the old property transaction and receive your sales proceeds.
Simply put, if you’re selling your old home while buying another, you can use the bridging loan for purchasing a home and covering other expenses.
A Bridging Loan is not to be confused with Singapore’s Temporary Bridging Loan Programme. The Temporary Bridging Loan is among the many business loans offered by the Singapore government to provide working capital to support small businesses through the pandemic.
Capitalised Interest Bridging Loan & Simultaneous Repayment Bridging Loan
There are two types of bridging loans in Singapore: Capitalised Interest and Simultaneous Repayment.
Capitalised Interest Bridging Loan is used to pay the whole price of a new property and payments will only begin once you get the sale proceeds, meaning you won’t have to pay two loans at the same time.
The Simultaneous Repayment Bridging Loan, on the other hand, is the other way around. You have to pay two loans simultaneously, those being the mortgage and the new purchase. This can be difficult for a while until you get your sales proceeds.
Comparing Personal Loans and Bridging Loans
|Personal Loans||Bridging Loans||Moneylender Personal Loans||Moneylender Bridging Loans|
|Interest Rate||3.6%||4-5%||1% – 4%||1% – 4%|
|Loan Amount||Approximately 6 times your monthly salary||Property value determines the amount||Up to 6x. $500-$50,000||Up to 6x. $500-$200,000|
|Loan Tenure||Banks may require 12-60 months (depending on their policies)||1-6 months||Up to 12 months, subject to the terms and conditions of the agreement||Up to 1 monthly only or until the property’s completion date|
When is it ideal to use a personal loan?
When you have a bad credit score, a personal loan is your best bet. As they are unsecured loans, you don’t need to put up any collateral against the loan amount. Most banks and institutions also offer personal loans.
Additionally, a personal loan can be used for any purpose at all, making them the ideal choice when you’re not sure how you’ll be using your renovation funds.
- A personal loan is typically available in most financial institutions.
- Minimal risk to the bank if you default on repayment.
- Easier to get personal loans because of lenient requirements.
- Flexibility of use.
- Weekly/monthly instalments.
- Although you can get one for any purpose, they aren’t the best as home loans because personal loan packages may be restricted to smaller amounts.
- Personal loans as a home loan substitute may be a red flag for many lenders.
Top Personal Loans in Singapore:
|Loan||Interest Rate||Tenure||Property Type|
|HSBC Personal Loan||3.4% (6.5% EIR)||Up to 3 Years||All types|
|CitiBank Quick Cash Loan (New Loan Customers)||3.45% (6.5% EIR)||Up to 3 Years||All types|
|CitiBank Quick Cash Loan (Existing Customers)||4.55% (8.5% EIR)||Up to 3 Years||All types|
|UOB Personal Loan||3.4% (6.42% EIR)||Up to 3 Years||All types|
|OCBC Personal Loan||5.43% (11.47% EIR)||Up to 3 Years||All types|
|DBS Personal Loan||3.88% (7.9% EIR)||Up to 3 Years||All types|
When is the best time to use a bridging loan?
Bridging loans are typically a more ideal option as a home loan in the interim between sale and purchase because they are used specifically for that purpose.
However, they still come with their own hang-ups to balance the advantages.
- Bridging loans give you more time to sell your previous property because you don’t need to wait for the sales proceeds to make a purchase.
- You won’t have to touch your savings or CPF funds if you get a bridging loan.
- With bridging loans you can make more attractive offers for new properties.
- Bridging loans let you move your things right away without having to rent or use storage.
- You can make a larger down payment than you would if you didn’t get a bridging loan.
- The bridging loan amount can also be used for other expenses.
- Bridging loans also have relatively high interest rates, which you’ll have to pay for monthly repayments along with closing costs.
- You’ll be using the property as collateral.
- Most banks do not offer bridging loan packages. Some banks offer bridging loans along with their home loans.
- There may be a period of you paying for multiple home loans before you receive your sale proceeds.
Top Bridging Loans in Singapore
|Loan||Interest Rate||Tenure||Property Type|
|DBS Bridging Loan||4.25% based on DBS prime rate||Up to 6 months||All types|
|Standard Chartered Bridging Loan||3M SIBOR + 2.00% p.a||Up to 6 months||HDB flat and Private Property|
|UOB HDB Home Loan||Determined upon application, between 4% to 5%||Up to 6 months||HDB flat and Private Property|
|Maybank HDB Home Loan||Determined upon application||Up to 6 months||HDB flat and Private Property|
Alternatives for Property Purchase Down Payment
A bridging loan can be a great tool to fund a purchase when you don’t have access to other long-term financial products.
A bridging loan, however, risks your first home, has a short repayment duration and comes with rates that typically range higher than other financial products.
These alternatives before settling for a bridging loan:
A home equity line of credit allows a homeowner to take out a line of credit against their home equity. Borrowers can use HELOCs on a revolving basis and the lines typically have payment periods that are as long as 20 years.
Interests on HELOCs also range around prime plus 2%.
2. Home Equity Loan
A home equity loan functions similarly to a HELOC as it allows homeowners to borrow against their home equity.
A home equity loan is a lump-sum payment with rates that typically start at about 2% above prime.
3. Line of credit
If you have a business, you can take out a business line of credit. It is a revolving loan that businesses have exclusive access to for addressing short-term expenses.
Unlike bridge loans, lines of credit are only paid only when you take out credit because they are not issued in a single sum. Loan terms can range from a few months up to 10 years, and rates can be as low as 7% from traditional banks.
Keep in mind that it getting a business line of credit from a bank can be difficult, and online lenders impose higher rates ranging anywhere from 4.8% to 99%.
4. Cash-Out Refinance
To use a cash-out refinance as a bridging loan alternative, you would need to refinance the mortgage on your current home for enough to pay off both the mortgage and the down payment on a new home.
This means you would need enough equity in your current home to make the transaction work, however you’d still have two mortgages until your current home sells.
5. Credit Card
Using a credit card is another option as a bridging loan alternative. You will be able to take out cash when you need to and if you make on-time repayments, you won’t need to incur interest charges!
However, you will only be able to take out as much as your credit card limit will allow, and taking out big amounts may keep you from making an on-time payment, putting you at the mercy of the high interest.
6. Moneylender Personal loan and Bridging Loan
While banks are the general go-to choice for any kind of loan, moneylenders present another financing source for both personal and bridging loans, especially if your credit score isn’t up to bank standard.
The Bottom Line
When it comes to picking between a personal loan and a bridging loan, it’s important to review the state of your financial situation to choose the best option that addresses your specific needs. Bridging loans may be more ideal, but in some cases, personal loans can be just as viable.
- A personal ultimately has less risk, because bridging loans put your home on the line.
- Bridging loans however are ultimately more appropriate for financing a new purchase when selling your old home.
- Bridging loans allow you to present more attractive offers without contingency when you’re purchasing a new home.
- Consider other options before committing to any of the two options, ‘
- Before jumping into any loan with a lender, make sure to shop around and consider all your options.
So when picking a financing option, consult Loan Advisor. It is a loan comparison site that reviews your financial situation and provides you with a list of the top licensed moneylenders in Singapore.