Purchasing a new home can be exciting, but it is also a significant decision that should be thought of carefully. Clearly, this decision is not for everyone as there are many factors to consider. However, if you are sure that it is the right time for you, another challenge would be to find suitable financial options to consider.
Do you have an existing property that has been sold but whose payment proceeds are still in process? If so, then a bridging loan could be a sensible option. On the other hand, a home equity line of credit (HELOC) could best suit borrowers who need funds for home improvement and other variable long-term needs.
While both options are used in the real estate industry, knowing which option to choose will reap greater benefits. Read through our guide to understand better how these options work and which one could be the best option for you.
Bridging Loan Vs. HELOC
To begin with, bridging loans and HELOCs are short-term financing options used in the real estate industry. These loans cover financial obligations like purchasing properties or monthly payments on mortgages. Still, they have significant differences in terms of purpose, loan requirements, and the overall process.
Bridge Loan vs. HELOC
|Purpose||Used to purchase a new home while waiting for the sales proceeds of an existing property||Can be used for other purposes like emergencies, home improvements, and debt consolidation|
|Loan Tenure||Three to six months||More flexible and can be repaid up to 30 years|
|Interest Rate Terms||3% to 11% (depending on the lender)||5.5% (on average)|
|Disbursement of fund||Disbursed in lump sum amount||Borrow funds as needed (works like a credit card)|
On the other hand, there are also similarities between the two options.
- In terms of qualification, both options require at least 20% home property equity.
- Both options allow a loanable amount of up to 80% of the property equity minus the CPF or mortgage balances.
How Does a Bridging Loan Work?
As the name implies, a bridging loan bridges the gap to when one can pay the new home property after receiving sales proceeds from an old one. Bridging loans are an excellent option if you don’t have enough cash or CPF funds to cover the property’s down payment.
Here are other features of bridging loans in Singapore:
Loan Amount – Commonly, the maximum loan amount is limited to the net proceeds minus CPF balances, if any.
Interest Rate – Higher interest rates due to the short loan term and the greater risk of default. Depending on the financial institution, typical interest rates may start from 5% up.
Tenure – In Singapore, it is mandatory to repay the bridge loan within six months.
Other Fees – Most banks will charge late payment fees anywhere between 3% to 5%.
Pros and Cons
Let’s look at the advantages and disadvantages of getting a bridging loan for home purchase needs.
- Provides quick funding as it is usually approved within two weeks
- You won’t have the financial weight of debt for an extended period of time
- No lengthy credit checks as the loan is secured against a property asset
- Can be more expensive than a traditional mortgage or housing loans
- Comes with higher interest rates and buyers will also shoulder other legal and admin fees
- You may lose your home if loan payments are not made within the short repayment period
A bridging loan could be the best fit for:
- Those who are relocating and are anticipating a quick sale of their property
- Need quick access to funds to acquire a new real estate property
- Those expecting a refinancing loan approval
Top Bridging Loans in Singapore 2023
|DBS Bridging Loan||Standard Chartered
HDB Bridging Loan
|UOB HDB Home Loan|
|Interest Rate||Prime rate||3-months SIBOR; plus 2% annual interest||4% to 5%|
|Loan Tenure||Max 6 months||Max 6 months||Max 6 months|
|Property Type||All property types||HDB||HDB|
Eligibility & Requirements
Applicants will be thoroughly assessed based on their credit reports from Credit Bureau Singapore. While financial institutions may have unique requirements, some key documents that are commonly required include:
- Latest six months bank statement
- Proof of sellable property ownership
- IDs and other supporting documents
How Does a HELOC Work?
A bridging loan is not a one size fits all type of loan and another alternative Singaporeans can consider for home financing needs is a HELOC. This is a type of home equity loan that allows homeowners to borrow money against their home’s equity.
A HELOC is a revolving source of funds that works similarly to a credit card. Herein, you can access funds, pay off balances, and draw more funds as needs arise. The risk of losing your home to non-repayment will also be lower due to the extended repayment period and lower interest rates.
Loan Amount – Borrowers can avail of up to 80% of the home property equity, depending on other factors like credit history and market value.
Interest Rate – On average, interest rates are at 5.5%, depending on the bank or lender.
Tenure – HELOCs usually come with a 10-year interest-only period and a repayment period of 20 years and up.
Other Fees – Similar to other loan products, other additional fees upon taking up a HELOC are processing fees and admin fees. You may also incur late payment charges by paying your loan past the due date.
Is There Any Downside to a HELOC?
One crucial downside to HELOCs is the risk of overspending. HELOCs allow you to make interest-only payments during the draw period. Some borrowers may tend to borrow more funds impulsively during this period.
Pros and Cons
HELOCs are one of the best home financing options today. Still, like any other financial product, HELOCs may also have advantages and potential drawbacks.
- Can work for any purpose from home improvement needs to debt consolidation
- Lower interest rates compared to credit cards and personal loans
- You only pay for what you spend plus corresponding interests
- There is a fixed draw period of usually ten years.
- Application process may be more complicated than other loans
- Interest rates may either go up or down
Top HELOCs in Singapore 2023
Due to unpredictable property market conditions brought about by the pandemic, major banks in Singapore have stopped offering HELOCs.
Alternatively, you can opt for a home equity loan where you can still borrow against your home’s equity but get a fixed interest rate instead. With a home equity loan, you can get up to 75% of your home value and pay for up to 35 years, depending on the borrower’s age.
Check out the table below for top offers:
|OCBC Home Equity Loan||DBS Home Equity Loan||Bank of China Home Equity Loan|
|Loan Type||one year fixed||five years fixed||two years fixed|
|3-year Average Interest Rate||1.45%||1.65%||1.82%|
Eligibility and Requirements for Home Equity Loans
Documents that are mandatory for an individual’s application are the following:
- Latest payslip/proof of income/notice of assessment
- Latest CPF statement
- Outstanding loan statement
Tips on Home Buying
Buying a new home can be a long and daunting process, and you will often require an expert’s advice. Here are some home buying tips to consider whether you are a first-time buyer or not.
- Determine a property price that you can afford.
Before considering a property, you should look at the flow of your income and monthly expenses. Note that you will not only be setting aside money for the monthly mortgage but also other necessary expenses like home insurance and renovation costs.
- Find a reliable real estate agent and one that fits your personality.
As mentioned, looking for a property can be a long process. As such, you should get a real estate agent with whom you can get along well. You can set a short appointment with a few matches to test their knowledge on the field and build rapport as well.
- Do a thorough inspection of the property you are considering.
To do this, you may need to hire a professional inspector to check out the electrical and structural components of the house. A few significant issues to look out for include molds, faulty wirings, and wall cracks. Such matters may also significantly impact negotiations with the seller on the price.
- Are there other alternatives to bridging loans and HELOCs?
Yes. Depending on your current needs, you can also avail of personal loans or take advantage of a 0% APR credit card to pay for home financing needs. Both are safer options as your home property won’t be compromised for foreclosure if you cannot pay back your loan immediately.
- Can I use my CPF funds to repay my bridging loan?
Yes. Your CPF savings are refunded once you receive the sales proceeds from your old property. You can use these funds to repay the bridging loan.
- How much CPF OA Savings can I use for my property purchase?
- Those with no property being financed using CPF:
Up to the lower of the valuation price or purchase price at the time of purchase
- Those with an existing property being financed using CPF:
Still, up to the lower of the valuation price or purchase price at the time of purchase. However, you can use your CPF savings only after setting aside the Basic Retirement Sum.
HELOCs are best for variable expenses as it allows you the flexibility to borrow depending on your needs. Bridging loans are best for those needing a large sum to pay for their new home while awaiting sales proceeds of old property. Still, be careful as both options are backed against your home property. Thus, you risk losing your home if you default on these loans.
- Bridge loans and HELOCs use your home as collateral; they may come with relatively lower interest rates than other unsecured loans.
- Ask yourself the purpose of the loan to better determine the right choice.
- Do not borrow against your home’s equity if you don’t have a concrete financial plan.
Whatever your current financial needs are, you can always count on 365 Credit Solutions for quick financial assistance. Among other licensed moneylenders, they offer competitive loan packages with fair interest rates to suit your needs. Contact them today and get a free loan quote with absolutely no commitment.