bridge loan vs heloc

Bridge Loan vs HELOC: Which Loan Works Best for You?

Bridge loans and HELOCs or “Home Equity Line of Credit” plans are popular short term financing options for Singaporeans who need to make a down payment on a new property before their current home sells. If this sounds like you, then you’ve come to the right place.

When you’re in this position, it’s important to act fast to avoid missing out on potential new homes before your current home sells – but this isn’t the sole use of bridge loans and HELOCs. Under some circumstances, you may also be able to use a bridge loan or HELOC to fund investments, repairs, and home improvements, too.

That said, it’s important to know how a HELOC and bridge loan works before you get started. This will help you secure the right short term financing plan for your financial goals.

Bridge Loan vs HELOC

Bridge loans are a better fit for those who wish to borrow more money to fund their home purchase. Meanwhile a HELOC is more suited to those who wish to avoid high interest rates and want more flexibility, and might also be the better choice if you’re purchasing commercial property.

 

 

 

 

Advantages

 

Disadvantages

 

Bridge Loan

 

  • Helps with an upcoming home purchase
  • Existing property is used as collateral
  • Shorter loan term of six months – three years
  • Multiple repayment options available
  • Often have higher interest rates
  • You’ll need your down payment ready beforehand
  • Pledging your current home as collateral can seem daunting
  • You must pay administrative fees
 

HELOC

 

  • Loan is secured against your existing home
  • Interest rates and administrative fees are lower
  • Access your HELOC funds whenever
  • Home equity loans can be used for other debts – not just property purchases
  • HELOCs have a limited “draw period”
  • Once the draw period ends, you’ll enter a repayment period to pay what you owe
  • Most lenders require 15-20% equity in your home
  • You could lose your home if you default

 

What Are Bridge Loans?

Oftentimes, quirks in the Singaporean property market can mean it takes longer than expected to sell your current property, which can delay the process of making your down payment. 

A bridge loan is a short term debt product that enables you to use loan proceeds to fund the purchase price of your new home. It will be secured against your existing home or other assets, and you can usually enjoy a repayment plan of six months – one year.

How do Bridge Loans Work?

As every bridge loan is secured against your assets, most lenders will want to appraise your current property before granting you any funds. You’ll then need to pay back what you’ve borrowed, plus interest payments, within an agreed repayment period.

Depending on the bridge loan lenders you use, you can expect to make interest payments of 3-11%, on top of closing costs of 1-3% of the total loan amount. Most bridge loans will allow you to use your CPF savings and it’s even possible to get a HDB bridge loan if required.

Most bridge loans are relatively easy to qualify for, so long as you have a current property or other assets that can be used as collateral. Credit history is not as closely scrutinized as with other types of loan.

Pros and Cons of Bridge Loans – Bridge Down Payment Gaps, and More 

Bridge Loan Pros

  • Quick to Apply For

Most lenders require just 14 days to process. Often, you can give your real estate broker your own deadline for making your down payment.

  • Low Interest Rates

By shopping around, you can secure an interest rate of 5-6% annually.

  • Raise Capital Easily

If you’re struggling to find immediate cash, a bridge loan can help you use your existing property as equity.

  • Buy Investment Properties Deposit-Free

Using your home’s LTV as its value basis can help you purchase properties deposit-free or, at the very least, using your loan as a large chunk of LTV.

  • Use Your Bridge Loan for Restoration Purposes

Many bridge loan lenders will allow you to use your bridge loan to purchase unconventional property types, such as homes that needs restoration.

Bridge Loan Cons

  • Costs More Than a Traditional Home Loan

Bridging loans charge an annual interest rate, which can cost more than the lower monthly rates charged on mortgages.

  • Short-Term Only

Most bridge loans are only available with repayment options of up to 12 months and can rack up a lot of compound interest if you run over.

When is Best to Use a Bridge Loan?

  • Situation 1 – Your Current Home is Under Contract but Won’t Close Before Your New Home Purchase

In this scenario, a bridge loan can help you quickly access the funds you need for your down payment, preventing you from losing out on your dream home.

  • Situation 2 – You Have Bought an Investment Property That Isn’t Producing Income Yet

Conversely, bridge loans can be useful if you’re buying an empty investment property that has not begun producing income.

Bridge Loan Cost and Eligibility

Costs

  • Interest of 3-11%
  • Closing costs of 1-3%
  • Administrative fees, appraisal fees, notary charges and other fees

Eligibility Criteria

  • Must hold 15-20% minimum equity in your current home
  • Must be a Singapore Citizen, Permanent Resident, or eligible foreigner
  • Must have a good credit score

businessman jumping over dollar sign to ridge

Getting a Bridge Loan from a Licensed Moneylender 

Getting a bridging loan from a licensed moneylender is an increasingly popular option here in Singapore. Licensed moneylenders will usually let you borrow up to six times your monthly salary, and it’s often possible to access unsecured financing, too – which means you won’t have to pledge your property as collateral.

What’s more, licensed moneylenders won’t usually scrutinize applicants’ credit scores as closely as a traditional bank might, making it easy for customers with poor or even no credit history to access the financing they need.

Right now, Singapore’s Ministry of Finance has imposed a 4% interest rate cap on all licensed moneylenders offering these kinds of loans. This means that you can enjoy great rates on top of all the other benefits.

Moneylender Bridge Loan Eligibility

To apply for a bridging loan with a licensed moneylender, you’ll usually need to provide evidence of:

  • Your NRIC
  • Proof of income, employment and residence in Singapore
  • SingPass details
  • Copy of your Option to Purchase

What is a Home Equity Line of Credit (HELOC)

A HELOC or “Home Equity Line of Credit” is another option for Singaporeans who need to secure a down payment on a new home purchase.

Under most circumstances, a home equity loan will allow you to borrow up to 80% of your existing home’s equity, minus however much you currently owe to mortgage lenders. So, on a $395,000 property that you owe $285,000 on, for example, you could potentially get a HELOC of up to $31,000.

Loans make it possible for regular citizens to make purchases sooner than they would normally be able to. When you refinance your home loan, you can switch to a different mortgage with a lower interest, helping you pay less than you would in your previous loan, resulting in more savings.

How Does a Home Equity Line of Credit Work?

A home equity line of credit is effectively a form of home equity loan. It grants you access to a cash pool that you can access for a lump sum whenever you need one during a pre-agreed draw period. During this period, you’ll also need to make interest only payments.

Eventually, your draw period will end, at which point any outstanding funds you owe will be converted into a standard loan. From here, you’ll need to make monthly payments toward that loan, with the rate of interest fluctuating according to market forces.

Pros and Cons of Home Equity Line of Credit – Low Interest Rates and More

HELOC Pros

  • Good Interest Rates

Often, you’ll pay less interest on a HELOC than you might on a personal loan, or typical credit card.

  • Potential to Lock-In Your Rate

Even better – you often have the flexibility to fix your rate before you start.

  • Access an Introductory Special Offer

Most lenders will waive fees or offer special rates to new customers.

  • Financial Flexibility

HELOCs don’t have to be used to fund home purchases – you can use each lump sum you draw on whatever you please.

  • Borrow More Money

You can usually borrow more cash with a HELOC than with a typical personal loan or credit card.

HELOC Cons

  • Interest is Affected by Market Forces

The majority of HELOCs on the market have variable rates of interest, which can prove unpredictable.

  • Draw Periods Hamper Flexibility

HELOCs can only be accessed during a set draw period. This hinders their flexibility.

  • Minimum Withdrawal Amounts

Some HELOCs have minimum withdrawal requirements, meaning you may to keep drawing down money even when you don’t need it.

  • Slower Application Process

Applying for a HELOC typically takes longer than securing a bridge loan.

  • Defaulting Could Result in Losing Your Home

As your HELOC will be secured against your home, you could potentially lose it if you default.

When is it Best to Use a Home Equity Line of Credit?

  • Situation 1 – You Need to Make a Down Payment on a Second Home

If you’re purchasing an investment property and need to put down a payment fast, a HELOC can help you do so while saving interest along the way. You’ll also benefit from lower monthly payments if you are able to sell your first property within your draw period.

  • Situation 2 – You Want to Consolidate Debts

As HELOCs can be used freely to pay off other debts and come with excellent interest rates, they make a great emergency fund for Singaporeans who wish to consolidate their debts in a low interest way – as credit cards and other alternatives often work out more expensive here.

HELOC Cost and Eligibility

Costs

  • Interest of around 5-6%
  • Closing costs of 2-5%
  • Administrative fees, annually assessed maintenance charges and other fees
  • Cancellation fees if you end your HELOC early

Eligibility criteria

  • Must hold 15-20% minimum equity
  • Must be a Singapore Citizen, Permanent Resident, or eligible foreigner
  • Must have a good credit score

Is a Bridge Loan or HELOC Best for You?

In all, bridge loans are by far the best fit for anyone who needs super-fast cash to fuel an imminently-needed down payment, while HELOCs are undoubtedly a better option for those who have a little more time on their hands and would like to save on interest costs – or for anyone who wishes to use their funds for other purposes.

Key Takeaways

  • Ultimately, bridging finance offers ample possibilities to Singaporeans, but whether bridge loans or HELOCs are right for you will depend on your unique financial goals – and neither of these two loans will ever be 100% stress free.
  • Depending on the bridge loan lenders you use, interest rates may differ, though licensed moneylenders will always offer rates of 1-4%.
  • Under most circumstances, a home equity loan will allow you to borrow up to 80% of your existing home’s equity, minus however much you currently owe to mortgage lenders. 

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