Whether buying a second property or renovating your current home, you will often need a financial tool to help you through. Bridging loans and HELOCs are popular choices for these real-estate situations in Singapore.
Home buyers expecting the sales proceeds soon from their property sales may opt for bridging loans. As another option, buyers may also choose HELOCs, as they can be used for any expense, including home improvement needs.
Both types are ideal for short-term financing needs. However, they work differently in many ways and can serve a better purpose depending on your needs. But, which one is a cheaper and better option? Learn more here to make a smart financial decision for your investment goals.
Bridging Loan vs. HELOC
For starters, both loans are secured against one’s property or asset. A bridging loan allows you to borrow a large sum based on your property’s equity. With a HELOC, you can draw cash as needed, similar to using a credit card.
Let’s look further at how each type works.
What is a Bridging Loan?
Bridging loans bridge the gap as you transition from your old home to your new home. These loans are ideal for situations wherein you have simultaneously listed your house for sale while buying a new property.
Typically, these loans are short-termed and come with higher interests. Depending on the bank, you may get a loan term, usually six months to five years. However, you can also obtain a bridge loan from a licensed moneylender at a flexible loan tenure of one month or until the property’s completion date.
How Does a Bridging Loan Work?
Depending on your home’s equity and financial standing, you may get a bridge loan of up to 75% of its LTV. However, you must pay the loan once you sell your old home.
For instance, you need to pay an initial down payment of S$200,000 for your new property. Your property has an equity value of S$500,000. You could take a bridging loan on your property’s equity and use it to pay these costs. Once you have sold your old home, you must pay for the bridge loan balance.
Pros and Cons
Bridge loans can be an excellent source of quick cash. When weighing the pros and cons, make sure you’ve laid out and considered all the facts and figures. Bridge loans come with many benefits, but it also comes with some risks. As such, before deciding, you should consider your current financial situation and needs carefully.
Pros
- Contingency Benefit – A bridge loan allows you to settle in your new home immediately, even when you haven’t sold your old home.
- Interest-only Payments – Some lenders may allow you to pay interest-only payments while your current home is being sold.
- Secure Fast Cash – Bridge loans are approved faster, and funds are released quickly.
Cons
- Higher Interest Rates – As bridge loans have shorter loan tenure, lenders may charge high-interest rates than longer termed loans.
- Increased Risk – Having a bridge loan could mean paying more than one loan all at once.
- Additional Costs – Other fees such as admin and closing fees may be tacked on to a bridge loan.
What Is a Home Equity Line of Credit (HELOC)?
A HELOC is a credit line that is secured by one’s property. Given this, it has lower interest rates and longer repayment terms of more than thirty years. It is flexible in terms of use and can also be used for other purposes such as:
- Home improvement
- Financial emergencies
- Debt consolidation
- Business investment
HELOCs are ideal for borrowers who don’t need to borrow a large sum all at once. Interest rates for HELOCs are based on the amount borrowed and are also dependent on the provider. However, take the utmost precaution when using it for other purposes, such as living expenses, as your property may be at risk once you default on payments.
How Does a HELOC Work?
As mentioned, HELOCs typically work like credit cards, where you get a revolving credit backed against your property. Your credit limit will depend on your home’s equity and credit worthiness factors. Also, you will have a draw period of ten years before your monthly repayment begins.
For instance, you have a credit limit of S$200,000, and you used $100,000 to pay for home improvement costs. During the draw period, you can choose to pay the required interest or part of the balance to restore your credit limit. However, after the draw period, and once you start with your required monthly repayments, you won’t be allowed to withdraw additional funds.
Pros and Cons
Like other financial products, HELOCs also come with a set of benefits and drawbacks. Check out some of these below:
Pros
- Repayment Flexibility. Offers the flexibility of having a longer repayment and interest-only period.
- Wide Range of Use. You may use it for various home improvement needs, debt consolidation, or business investment.
- Low Interest Rates. HELOCs have lower interest rates than credit cards and personal loans.
Cons
- Risks of overspending. Without financial planning and discipline, you may borrow more than what you really need.
- Variable interest rates. Interests may either go up or down during the draw period.
- Complex application process. The application process may be longer and more complicated than conventional loans.
When is a Bridging Loan or a HELOC Useful?
While both are used in the real estate industry, knowing when which loan to choose is crucial. Having a clear idea of how these loans work can be helpful since you are putting your property on the line. Here are a few starting points:
Bridging loans makes sense when:
- Securing property wherein time is of the essence, such as in auctions
- Paying for the downpayment of a new property while waiting for the sales proceeds of your old property
- Expecting a refinancing loan approval
HELOCs are helpful when used for:
- Improving the property to increase its value
- True financial emergencies
- Paying down payment costs
Still, like any other loans, you have to make sure that your monthly cash flow will allow you to make future repayments.
Choosing Between a Bridging Loan and a HELOC
While bridging loans and HELOCs are helpful in real estate transactions, they vary in many ways. Knowing the key similarities and differences will help you choose which option best suits your needs.
At a Glance: Bridge Loans and HELOCs Features
|
Loan Type |
Interest Rate |
Loan Tenure |
Disbursement |
|---|---|---|---|
|
Bridge Loans
|
Typically, 3% to 11% 1 to 4% monthly |
Six months to five years One month or until the property’s date of completion |
Lump sum amount |
|
HELOCs |
Depend on the amount borrowed |
Up to 30 years |
Withdraw funds as needed |
Similarities
Meanwhile, let’s take a look at a few similarities:
- Both options are secured against your home as collateral and require at least 20% home equity.
- With both, you can borrow large sums of up to 75% of your property’s LTV. For licensed moneylenders, you can borrow up to 6 times your monthly income.
Top Bridging Loan Options in Singapore 2022
|
Property Type |
Interest Rate |
Loan Tenure |
|
|
DBS Bridging Loan |
All property types |
Prime rate |
Up to six months |
|
Standard Chartered HDB Bridging Loan |
HDB |
3-months SIBOR; plus 2% annual interest |
Up to six months |
|
UOB HDB Home Loan |
HDB |
4% to 5% |
Up to six months |
|
Bridging Loans from Licensed Moneylenders |
All property types |
1% to 4% monthly |
From one month to until the property’s completion date |
From the list, a bridge loan from a licensed moneylender is probably the best option. More so for borrowers who do not have adequate credit history and those needing longer repayment terms. It is also ideal for both HDB and non-HDB purchase, thus allowing a wider property choice.
Which is a Better Option?
HELOCs can be cheaper in terms of interest as you are only charged interest depending on the amount you borrowed. It also does not come with additional property-related transaction fees. Moreover, the extended repayment period poses lower risks for both the lender and the borrower.
HELOCs are best for variable expenses such as renovations and refurbishing needs. However, major banks in Singapore are currently not offering HELOCs due to unpredictable property market conditions. As such, home loans and bridging loans could be your best options at the moment.
Alternatively, a bridging loan from licensed moneylenders is an excellent option and an ideal way to build a good credit score. So, whether upgrading to a condominium or buying a bigger HDB flat, you can always rely on moneylenders for quick cash. Aside from offering flexibility in terms of tenure, you can also expect lower interest rates and fast approvals. If you are looking for a flexible loan designed to help your businesses bounce back, you can consider applying for a temporary bridging loan.
Closing
Pursuing your new home need not be a daunting task with the right financial tool. Still, keep in mind that along with finding the best option is having the right financial discipline and proper planning.
Key Takeaways:
- Loans backed against properties pose high risks and should be carefully understood.
- Knowing how much you need, the exact purpose and your monthly cash flow are a few crucial things to consider.
- Bridging loans are an excellent alternative to achieve your investment goals while building your credit score simultaneously.
Whatever your financial needs and goals are, you can always count on Raffles Credit to extend urgent assistance. We are a reliable and licensed moneylender that offers competitive loan packages to suit your needs. Fill up our quick form online and get your free loan quote today!
