bridging loan vs term loan

Financing Your Property Upgrade: Bridging Loan vs. Term Loan

Many Singaporean homeowners are upgrading their property despite the economic situation. Families in Singapore are growing by between 20,000 to 25,000 annually, so there’s a need to upgrade to roomier spaces. 

2021 saw the selling of countless condominiums. New launch condos such as the executive condo (EC) and The Reef at King’s Dock were selling like hotcakes.

Although homes in Singapore are attractive and plentiful, they can also be expensive and are generally a huge fiscal commitment. You may be in the upgrading process, but don’t have enough cash. In these instances, a loan can help, but deciding which loan is best for you between a bridging loan and a term loan can be a daunting task.

We’re here to help. This article has all the details you need on the two loan types so you can make an informed decision. Let’s dive right in.

Bridging Loan vs. Term Loan

Bridging Loans bridge the gap between purchasing their new property and keeping their current mortgage until their old property sells. Term Loans are loans in which the lender offers to the buyer an agreed loan amount in a lump sum. See more details in the table below:

Home Loan Type Loan Amount Interest Tenure
Bridging Loan
  • Up to 6x your monthly salary (licensed moneylenders) 
  • Up to 25% of the purchase price of the new property (banks)
  • 1-4% (licensed moneylenders)
  • 6% to 11% (banks)
  • These interest rates may increase with time.
  • 1 month or until the property’s completion date (licensed moneylenders)
  • 6 months to a year (banks)
Term Loan (home loans, equity term loans) The loan amount varies depending on the agreement between the lender and the borrower.
  • Low-interest rates (1-3%)
  • The rate is reduced if the borrower pays the debt earlier than the agreed upon period.
  • 1-3 years (intermediate term loans)
  • Less than a year (short-term loans)
  • 3- 25 years (long-term loans)

 

Bridging Loans – Perfect for Homeowners Looking to Transition Into a New Property Quickly

Also referred to as gap financing, bridge financing, swing loan, and interim financing, a bridging loan is a short-term loan. Borrowers use it until they secure a permanent financing option. A bridging loan is usually taken by homeowners upgrading or downgrading their existing flats or selling old apartments. 

A bridge loan works to bridge the gap between purchasing their new property and keeping their current mortgage until their old property sells. The maximum bridging loan amount you can borrow is S$1,000,000. You can utilize the equity in your current property for the down payment on your new space.

Bridging loans typically last for 6 months to a year. Plus, they can have high interest rates that generally range from 6% to 11% if they’re from banks. On the other hand, bridging loans from a licensed moneylender have an interest rate of at least 4%.

A traditional bank offers it in two main forms:

  • Capitalised interest bridging loan- it covers the entire amount of the new property you wish to buy.
  • Simultaneous repayment bridging loans- such bridge loans enable you to pay your new home’s loan and the bridging loan simultaneously. 

How Does it Work

When a homeowner decides to sell their existing space and buy a new one, it’s usually challenging for them first to secure a contract to sell that property and close on a new one within the same duration.

Additionally, they may be unable to make a down payment on the second property before obtaining cash from selling their first home. Here’s where a bridging loan from licensed moneylenders comes to the rescue.

Assuming you’d like to sell your current property to buy a new one still under construction. And you’ll only get the sales proceeds in CPF funds or money after five months. 

Let’s imagine further that you’ve only paid the five percent down payment. But you don’t have enough money to clear the remaining 20% down payment since you’re still waiting for the proceeds from your current space. 

Well, no sweat, as you can borrow a bridging loan of S$200,000 to clear the pending down payment. The loan gives the borrower money to buy a new place even before they sell their current home. The homeowner uses the returns from selling their existing property to clear the credit.

Bridging loans may be convenient, but they’re equally risky. It isn’t guaranteed that you’ll sell your home within the stipulated time. When that happens, you’ll have to make payments on the loan, your first mortgage, and the mortgage on your new property.

Pros

  • You can defer payments to interest- only until you can sell your old property.
  • It offers a safety net- you won’t have to rent a place should you sell your previous property before you purchase a new one.
  • You can buy a new property with it while your existing home is on the market.
  • It allows you to place a down payment on your new home without using the profits from selling your old property.
  • Faster application- online bridge loan application is quicker compared to other methods. All you have to do is log into the moneylender’s website, fill in your details and present the necessary documents, and wait for a confirmation message to notify you of your loan’s approval.
  • Flexible lending criteria- still on bank moneylenders and collateral, these lenders focus more on the collateral’s value rather than the borrower’s credit history, income, and affordability.

Cons

  • Higher interest rates- the rates are higher compared to other loan alternatives like HELOCs.
  • They’re secured if they’re from banks. This means the financial institutions use your property as collateral should you take longer to pay your debt. However, licensed moneylenders offer unsecured bridging loans. They may check your credit score but rely more on your employment status and salary.
  • The interest rate might increase with time- especially if the lender uses a variable prime rate.
  • Its closing fees can be high.

With these said, bridging loans are ideal for homeowners who are either looking to buy a new space before selling their current property or those who’d like to sell their property quickly to take advantage of a sweet deal while it lasts.

happy asian young family house mortgage

Term Loans – Ideal for Homeowners with Private Properties for Security

Also known as equity term loans or home loans, a term loan is a deal between a lender and a borrower. The lender offers an agreed amount in a lump sum. They get it back through a series of tinier monthly repayments from the borrower.

The borrower agrees to a repayment schedule with a floating or fixed interest rate as motivation for the lender. Such loans may need sizeable down payments to lower the loan’s total cost and payment amounts.

Lenders offer borrowers term loans for various reasons. One of them is to upgrade their property. Of course, the borrower has to prove they’re worthy of the loan. They have to offer the required statements and other similar financial evidence.

How Does it Work

A borrower approaches a licensed and regulated moneylender for it. Once they meet the requirements, they get a lump sum payment of, say, S$1000,000 and must repay it within 6 months with a 2% interest rate. The interest rate is lowered if they clear the debt earlier than expected.

However, they’ll pay 1,000,000 + (102/100 x 6) = S$6,120,000 at the end of the set payment period.

Usually, they repay it over an agreed-upon duration, normally on a quarterly or monthly repayment schedule.

The loan can carry a set maturity date and a variable or fixed interest rate. A property’s useful life can affect the repayment schedule if the proceeds fund an asset’s purchase.

It requires a thorough approval process and collateral to lower the risk of failure to pay or defaulting.

Term loans exist in several forms:

  • Long-term loans: They exist between three to twenty-five years. 
  • Short-term financing loans: They usually exist for less than a year. They can also last for a year and a half in rare cases. Some moneylenders think of loans of more than five years as short-term loans. Borrowers who pick them have an emergency need that they can repay easily within a short duration.
  • Intermediate-term loans: They run from between one to three years. They’re cleared in monthly instalments.

Pros

  • It allows for early credit repayment- in some cases, loan agreements state that you can repay your loan earlier than the agreed time without penalty. Early loan repayments equal interest expense reduction, allowing you to tackle a new debt stress-freely and buy more than one property.
  • It offers low-interest rates- granted, its rates aren’t the lowest, but they’re pretty low compared to other financing options. This is due to one simple fact: Your loan has more time to accumulate interest the longer your term is.
  • It has a predictable payment schedule- with it, you know when you should clear your loan and how much you should pay (if it doesn’t have a floating interest rate). This allows you to put your finances in order in advance.

Cons

  • It has strict qualification requirements- lenders put extra emphasis on a borrower’s credit risk. Your credit score has to be excellent, and you must be able to pay on time.
  • It has a possibly slow funding time- the application process can take weeks, if not days, to unfold fully. And that’s not all. There are countless other internal procedures the lender has to complete before funding the loan, delaying the money even more.
  • It has inflexible payment schedules- the predictable payment schedule perk was a plus, but this is an outright negative. A term loan’s payment schedule is usually inflexible if it carries a strict policy on credit remuneration. Invoice factoring might clear your obligation when you pay the loan balance, but that’s not the case for a term loan, which is usually recorded and adhered to. 

Given all of the reasons above, term loans are best for homeowners with private property. You won’t be eligible for cash-out refinancing if your only property is an HDB flat.

Final Word

Sure, you should pick a loan based on your situation, but a bridging loan is a better option for financing your property upgrade. It may have risks, such as your property being collateral if you fail to pay on time, but the good news is that licensed moneylenders offer unsecured loans.

On the other hand, term loans require you to clear three separate loans if your old property doesn’t sell on time. These loans include your home equity loan, the existing mortgage, and the new mortgage. Get a bridging loan from a reputable moneylender so you can finance your property upgrade stress-freely.

Key Takeaways

  • Bridging finance loans typically last for 6 months to a year.
  • Bridging finance loans are less riskier than term loans for a property upgrade.
  • Licensed moneylenders do not consider your credit score when offering you a bridging loan. They focus on your salary and employment status.
  • Term loans have a longer approval time than bridging loans.
  • Licensed moneylenders offer bridging loans with a lower interest rate (roughly 1-4% per month) than banks (6% to 11% per month).

On this note, if you’re already set to avail a bridging or a personal loan, check out Instant Loan. We provide you with the best personal loan and bridging loan offers from three of Singapore’s best money lenders free of charge. Fill out our quick form today to get started.

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