Getting a residential property in Singapore is notoriously expensive. As such, buying a property requires financial prudence as it even gets more expensive once you are purchasing your second property. Not to mention the required down payment, the additional stamp duties, and the increase in interest rates due to inflation.
As a buyer, you will need a significant amount of cash on hand for your property upgrade. This statute applies especially to those who are buying their second property while still paying for the mortgage of the first one. This is where bridging loans and HELOCs become handy.
But while bridging loans and HELOCs are both useful for real estate ventures, they also come with restrictions and differences. Read on to cut out the guesswork and learn which one is right for you.
Bridge Loans Vs. HELOCs
Bridge loans and HELOCs are financial tools that are used by real estate buyers and investors. Both are short-term financing options that give buyers the needed cash to use for property purchase. But while both can be used for the same purpose, borrowers need to decide based on how one can be more beneficial to them.
Thus, deciding between the two means taking a good look at their differences and how they work.
What are Bridge Loans and How Do They Work?
Bridge loans, as the name implies, “bridges the gap” to when funds or permanent financing become available. Banks offer these loans to borrowers using their homes as a collateral. Most bridge loans come in very short terms and steep interest rates due to the high risks involved.
Often, bridge loans are used to help pay for the downpayment costs of a new home purchase. However, these loans need to be paid immediately once the sales proceeds from the home are received. Otherwise, the bank can take legal actions such as foreclosing your property once a borrower defaults on payments.
Note that licensed moneylenders also offer bridge loans with lenient requirements and with no collateral. They also offer flexible loan tenure of one month or until the property’s completion date.
Pros and Cons
Bridge loans also have their set of benefits and drawbacks. Here are a few crucial ones to note:
- Immediate access to a large amount of cash
- Faster application and approval process
- No lengthy debt tenures
- Bridge loan rates are higher than regular home mortgage rates
- You’ll need to start making monthly payments immediately and this could be a problem if you don’t sell your home quickly
- More expensive than traditional loans
When to Use Bridge Loans
Usually, it is used as a contingent by property buyers who are promptly selling another asset to pay back the loan. For instance, those who are waiting for the sales proceeds of their old home while in the process of buying a new home. It also works for real-estate scenarios such as:
- Buying bargain properties at an auction
- Renovating a property to increase its value
Where and How to Apply?
Qualifying for a bridge loan will factor in your ability to pay and financial obligations such as existing mortgages. This is especially true if you plan to obtain from a bank, where there are stricter qualifications and documentation requirements.
- Singapore Citizens and Permanent Residents who are in the process of selling their current property
- Aged 21 years old and above
- Must have proof of the sale of existing property
You will also need the following:
- Proof of Residence (could be a utility bill or a letter addressed to the borrower)
- Proof of Income/Employment (recent payslips)
- Copy of CPF statements
- Bank loan balances
- A copy of your Option to Purchase (OTP)
- Singpass (for CPF, HDB, and IRAS log-ins)
Getting a bridge loan from a licensed moneylender could be a faster and easier process. Aside from requiring no collateral, you could also get the loan amount up to six times of your monthly salary. They also process applications fast and disburse funds quickly.
For Money Lenders:
Here’s how you can qualify from them:
- Monthly income of at least S$1,500 (Singapore Citizens and Permanent Residents)
- Aged 18 years old and above
- Must have Option to Purchase (OTP)
- NRIC/proof of identification
- Proof of Income/Employment (recent payslips)
- Proof of Residence (utility bill or mailed letter addressed to the borrower)
- Copy of OTP
What are HELOCs and How Do They Work?
A Home Equity Line of Credit (HELOC), as the name implies, is a line of credit where you can borrow cash as needed. It works similarly to a credit card, however, this one is backed against your home as collateral. Given this guarantee, HELOCs come in lower interest rates, similar to home loan mortgages. Moreover, it has longer repayment terms of up to thirty years.
Home equity lines of credit are more flexible compared to bridge loans and can be used for other purposes such as:
- Financial emergencies
- Educational funds
- Health/Medical expenses
- Debt consolidation/paying credit card debt
- Business capital/investments
Moreover, it has a draw period where the borrowing can draw funds up to the maximum limit. During this period, the borrower can also choose to pay interests only.
Pros and Cons
HELOCs also come with its own set of advantages and drawbacks. Here are a few of them:
- Tax deductibility on interest payments
- You don’t have to repay the amount immediately and make interest only payments during the draw period
- Can work for any other useful purposes
- A downside to HELOCs is the risk of overspending
- Application tends to be complicated
- Converts into a loan payable once the draw period ends
When to Use HELOCs
HELOCs allow you to draw cash whenever you want for as long as there is available credit during the draw period. As banks may allow borrowers up to 80 percent of the home’s equity, funds may also be used to pay for the downpayment or renovation costs.
Where and How to Apply?
Homeowners need at least 20 percent equity on their homes to qualify for a HELOC. On top of this borrowers should also have a good credit history, a steady source of income, and a low debt-to-income ratio.
As of current writing, major banks in Singapore have temporarily stopped offering HELOCs. This reason is due to unpredictable property market conditions brought about by the pandemic,
Bridge Loan Vs. HELOCs: Key Differences
Bridge loans and HELOCs may work similarly in many ways. But as a borrower, there are also some essential differences that are worthy to note.
Here’s a quick look at their differences:
Loan Term Tenure
1. Interest Rates
HELOCs come with lower interest rates compared to bridge loans, often matching home loan mortgages. With a HELOC, interest rates are charged only on the funds borrowed as opposed to a bridge loan where interest is charged on the full amount.
Moreover, bridge loans come with higher interest rates because they often work as a contingent on when funds become available, posing higher risks.
A bridge loan and a HELOC that is taken from a bank both require your home as collateral. HELOCs can be only availed from banks while a bridge loan may be obtained from a licensed moneylender with no collateral required.
3. Loan Tenure
In terms of time frame, bridge loans are paid in a shorter period of up to a common term of usually six months. This factor depends on the bank or the financial institution. Meanwhile, HELOCs have a longer term of ten to up to thirty years.
4. Loan Structure
Bridge loan funds are disbursed in a one-time lump sum amount. On the other hand, HELOCs work like a revolving fund where you can draw funds on an ongoing basis for as long as you have available credit.
5. Fees Involved
Bridge loans come with fees like processing fees, late repayment fees, and other fees. HELOCs don’t come with closing costs and may only come with processing and admin fees.
HELOCs have better flexibility as borrowers may also be used for other purposes other than buying a home. Bridge loans are specific to purchasing a home and the closing costs involved.
The key difference between a bridge loan and a HELOC is the loan structure and the interest rate. A bridge loan offers a significant amount in a lump sum at a fixed rate. Meanwhile, a HELOC allows limited funds as needed and on a variable interest rate. It also varies in terms of risk level, wherein bridge loans are riskier due to the shorter tenure.
Which is Right for You?
Deciding between a bridge loan and a HELOC depends on the borrowers’ preferences, financial circumstances, and qualifications. Bridge loans may be best if you are looking forward to getting a large sum of money to use for your home purchase. Otherwise, if you are looking at other purposes other than a home purchase, you may opt for a HELOC. Find out more on the best bridging loan available in Singapore.
Alternatives to Bridge Loans and HELOCs
Bridge loans and HELOCs that are taken from banks put you at a high risk of losing your property. Before committing to these options, you may want to look at other alternatives with lower risks or cheaper interest rates such as:
1. Home Equity Loans
Home equity loans are second mortgages on your home. These loans allow you to borrow from the remaining equity in your home at a lower interest rate and a longer term.
2. Personal Loans
Personal loans are unsecured loans that can also be used to pay for home costs and other financial concerns. These loans are based on your income and have varying terms and conditions depending on the bank.
You may also opt to apply from a licensed moneylender and get up to six times your monthly income. They offer personal loans at 1-4% monthly interest and disbursed funds in as fast as one day. Find out more on the differences between Personal Loan and Bridging Loan.
Bridge loans and HELOCs are both helpful in buying properties and are ideal for covering immediate short-term financing obligations. But, choosing between the two always comes down to the amount of money you need.
- Get a bridging loan if you need a quick amount of significant sum to cover down payment costs.
- HELOCs are the best option if you could afford the HELOC payments on top of other financial obligations once the draw period ends.
- HELOCs and bridge loans taken from a bank could put you at risk of losing your property once you default on payments.
- A licensed moneylender is another good alternative as you could get a large amount of money without the risk of losing your property.
Need access to immediate funds? Get started on your financial goals by checking out Bugis Credit. Among many licensed moneylenders, we offer competitive bridging and personal loan packages at affordable rates. Get your free loan quote today!