Bridge Loan vs. HELOC: Which Is Better & Other Considerations

Finding the right home for your property upgrade can be a daunting task. But needing to move fast to buy a new home can be tougher. In some cases, homebuyers sell their current property before they finalize their new home purchase. This can create a financial gap between selling and buying a new property.

Thankfully, you can turn to short-term financings, such as bridge loans and home equity lines of credit (HELOC) to get the funds you need. Both types of loans provide financial assistance to facilitate buying a property. However, the use of these funds may differ between the two.

Bridge loans are typically used during the process of purchasing a new property while you wait for the sales proceeds of your old home. A HELOC can have many different uses. Read on to learn how these two financing options can help you.

Bridge Loan vs. HELOC in a Nutshell

Both bridge loans and home equity lines of credit (HELOCs) provide home buyers cash to use for a home purchase. These loans rely on your home’s equity for approval. The key difference is that a bridge loan provides a lump sum amount while HELOCs are a revolving credit.

In a nutshell, a bridge loan is used when you want to sell your old home and buy a new one simultaneously. It typically has a term of 6 months to a year with a higher interest rate than other financial instruments. HELOCs, on the other hand, work similarly to a credit card wherein you can withdraw as much as your approved credit line.

Deciding which short-term financing to use will depend on your personal circumstances and preferences. As such, it’s best to take a good look at how each of these financial options works.

What is a Bridging Loan?

A bridge loan is a short-term loan, also referred to as bridge financing, gap financing, or interim financing. This type of loan helps you pay off part of what’s owed for a down payment and closing costs before receiving the sales proceeds of your old property.

The application process for bridge loans is generally faster than for traditional loans. Additionally, if you can qualify for a home loan, there is a higher chance of getting approved for a bridge loan as well. As such, it is a popular choice for homebuyers who need quick cash to close a property transaction before their current home is sold.

Banks Bridging Loan Key Features:

If you’re borrowing from a bank, you can borrow up to 25% of the purchase price of the new property – as long as you have enough funds from the sale of your old property.

Take a look at this illustration:

Let’s assume you are selling your existing property to purchase an HDB flat worth S$750,000. However, you won’t be receiving your sales proceeds until after 3 months.

Say you have paid the first 5% down payment in cash. However, you still need to pay the next downpayment of S$150,000 to close the property transaction. With a bridging loan, you can borrow enough funds to cover the financial gap.

Licensed Moneylenders Bridging Loan Key Features:

If you’re borrowing from a licensed money lender, you can borrow up to 6x your income with only up to 1 month repayment period – or until the property’s completion date. Additionally, licensed lenders in Singapore can only charge up to 4% interest per month.

Pros and Cons of Bridge Loans

Pros

• Move fast to buy a home. No need to wait for the sales proceeds of your current property before closing the purchase of your new home.
• Flexible repayments. If you’re borrowing from a bank, you can choose whether to commence loan payments after your old home sells or to simultaneously repay your home loan along with the bridge loan. Note that this option is not available for licensed moneylenders.
• Make your new home affordable. You can afford to pay the down payment even when you’re yet to receive the sales proceeds of your old property.
• Avoid renting. You can immediately move into your new home even if your old property is still on the market.

Cons

• Loan repayments can be quite burdensome. If you take up a bridging loan on top of your mortgage, you’ll be repaying two loan charges and two interest rates.
• High interest costs. Bridge loans have higher interest rates than other financing options. For instance, average interest rates for home loans range between 0.80% and 2.50%.
• Extra fees. You may incur termination fees if you choose to repay the bridge loan early or if you switch from a bridge loan to a home loan before the term ends.
• Your property value might go down the longer it is in the market. If this happens, you’ll be paying for a larger repayment plus interest on your bridging loan.

How To Apply

The eligibility criteria and document requirements may vary depending on the bank or financial institution. Here are some of the most basic requirements:

Eligibility:

• Age: At least 21 years old
• Minimum Annual Income:
  • Singaporean or Singapore Permanent Residents: S$30,000
• Foreigners who are in the process of selling their property in Singapore can also apply for a bridging loan

Document Requirements

• Option to Purchase (OTP) document
• In-principle approval letter from HDB
• Letter of authorization to HDB
• CPF withdrawal statement
• Outstanding bank loan statements

For a complete list of required documents, it’s best to visit your bank of choice. You can also find out the best bridging loan available in Singapore.

How To Apply: Licensed Moneylender Alternative

What if a traditional bank bridging loan is not available for you? You can consider taking a bridge loan from licensed money lenders in Singapore. Here are the basic requirements:

Eligibility:

• Age: At least 21 years old
• Minimum Income:
  • Singaporean or Singapore Permanent Residents: S$2,000
• Exercised the Option to Purchase (OTP)

Document Requirements

• Identity card / NRIC
• Proof of residence (utility bill, a letter addressed to you and/or tenancy agreement)
• Proof of employment (certificate of employment or recent 3 months’ worth payslip)
• SingPass (to log into CPF, HDB, IRAS website)
• Copy of the “Option To Purchase” (OTP)
• Outstanding bank loan statements 

What is a HELOC?

With a Home Equity Line of Credit (HELOC), you get a line of credit based on the equity of your existing property. Do not confuse this type of loan with a home equity loan. With a home equity loan, a lump sum is disbursed upfront and paid back in fixed installments.

HELOCs, on the other hand, share similar characteristics with a credit card wherein you are given access to an approved credit line. You can withdraw money within a credit limit, pay it off, and withdraw again. Note that you’ll need to repay during a set amount of time, referred to as the draw period.

Key Features:

Pros and Cons of HELOC

Pros:

• Choose how much – or how little, to use your credit line
• Interest-only payments are an option
• Can be used for various purposes – not just for paying property down payment
• Credit line available for emergencies

Cons:

• May lose your property if you fail to make payments
• Easy to overspend so it requires a lot of discipline
• Variable interest rates mean your payment fluctuates making it hard to budget

How To Apply

The eligibility criteria and document requirements will vary depending on your bank or financial institution. But here are the basic requirements:

Eligibility:

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

Due to the unpredictable real estate market conditions, major banks in Singapore have stopped offering HELOCs.

As an alternative, you can consider taking Home Equity Loans which still involve borrowing money against your home’s equity. However, you’ll be getting a fixed rate. Plus, you can borrow up to 75% of the appraisal value of your existing home with a maximum repayment period of 35 years – depending on the borrower’s age.

Considerations When Choosing the Right Loan for You

Short-term loans entail more risks because they usually come with high interest rates. Additionally, you’ll have a shorter loan tenure which means significant monthly payments. So before you make a decision, here are a few things to consider:

• Determine what you’re going to use the loan for. If you’re using it to pay the down payment of your new home, a bridge loan is a good option. If you want more flexibility, HELOC may meet your needs.
• How much do you need to borrow? With a bridge loan, you can get a lump sum of up to 25% of your new home while a HELOC gives you revolving credit which you can withdraw from.
• What type of repayment do you prefer? Bridge loans can be flexible. Most bridge loans only have up to 6 months repayment term. You can either pay off the loan plus interest after your existing property sells or pay your bridge loan and mortgage loan simultaneously.

Closing

Whether you choose a bridge loan or HELOC will depend on your personal situation, needs, and ability to repay the loan. If you prefer a large lump sum of money to close a property transaction, you may want to consider a bridge loan.

Key Takeaways:

• Bridge loans and HELOCs are short-term financial tools that allow you to borrow money for buying property.
• Bridge loans have higher interest rates than home loans or personal loans and have a limited loan structure.
• HELOCs are home equity loans that allow you to borrow money against your existing property at a set credit limit.
• If traditional bridge loans and HELOCs are unavailable to you, borrowing from a licensed moneylender is a viable option. Licensed lenders offer quick disbursement and fair interest rates.

Need quick cash for your goals? 1 Fullerton Credit offers fast, hassle-free, and tailored personal and bridging loan plans at affordable interest rates. With over 550 satisfied clients and reviews on Google and Loan Advisor, you can borrow confidently with us! Request a quote today.