Contrary to what some may believe, a bridging loan is not a personal loan, at least not according to how you use it. A personal loan is a loan package from banks and licensed moneylenders that you can use to do many different things. On the other hand, a bridging is mainly used to purchase HDB property listed on the market; or other property types.
Personal loans tend to have more extended repayment periods compared to bridging loans. Additionally, bridging loans will require that a borrower has an old house they are already selling and wants to buy a new house (e.g., a new HDB) listed on the HDB market.
Why Do People Use Bridging Loans?
Bridging loans provide a way for buyers to acquire new property as they wait to sell an old property they have put on the market. The loan allows them to use the property they are using as collateral against the loan they are taking. They use the funds from the loan to put a down payment on the new payment and secure it.
After their property sells, they can use the funds they get, together with any resulting CPF funds, to pay for the bridging loan amount.
Personal Loan vs. Bridge Loan: The Main Differences and Similarities
The key differences between personal and bridging loans are:
- Purpose: While bridging loans aim to provide the borrower with funds to acquire a new property, personal loans can be used for any purpose.
- Loan amount: The loan quantum of banks personal loans is usually up to 10x the borrower’s monthly income, while banks bridging loans can let you loan up to your 75% Loan-to-Value or $200,000.
- Interest: Banks’ bridging loan interest rates range from 5-6%, while moneylenders charge 1-4%. Note that with a shorter repayment period, you’ll also pay less interest.
- Repayment: The repayment period for personal loans is up to 12 months for moneylenders and up to 5 years for banks. While bridging loans have a tenure of one month or until the purchase is complete for moneylenders and usually less than 6 months for banks.
Standard Bridging Loans
Both banks and licensed moneylenders offer bridging loans to those looking to buy new properties. While the use for both loans is the same, there are a few differences.
Moneylender bridging loans attract an interest rate of up to 4%. Also, the repayment period is one month or until the property purchase is complete. The maximum loan quantum is up to 6X the borrower’s monthly salary.
Bridging Loan Types
There are mainly two types of home loans. These are primarily differentiated based on how one repays the loan. The two types are simultaneous repayment bridge loans and capitalised interest bridging loans.
These types of loans are available from banks and do not apply to licensed moneylenders.
- Simultaneous Repayment Bridging Loan
This type of loan is similar to other bridge loans offered by banks and the Temporary Bridging Loan Programme (TBLP) in that you pay the loan principal and the interest. The interest rates charged on this bridging loan are usually lower than those charged for capitalised interest loans.
- Capitalised Interest Bridging Loan
This is a type of bank bridging loan where you pay the loan in full before paying the interest later on as a lump sum repayment. You can choose this option if you feel you will not be comfortable paying the loan premium and the interest in each monthly repayment.
The interest on this home equity loan is usually higher since the bank will take an additional risk by allowing you to get rid of your listed property before using the sales proceeds to pay.
Interest Rates
Bridging loans are a great way to speed up the purchasing of a new property by providing you with the funds to meet commitments from the seller. However, since they are short-term loans, they tend to have additional risk and high-interest rates. The interest rate levied by most financial institutions ranges from 3% to 6%.
Monthly Repayments
Banks will need the borrower to make monthly repayments, including interest on the bridge loan they received. For example, if you took a bridging loan of $120,000 with a tenure of six months, you will be required to pay a base monthly payment of $20,000 plus interest.
The borrower needs to ensure that the net sales value of their listed property is higher or as close to the bridging loan value as possible to make repayment easier.
Loan Tenure
The banks offer bridging loans with varying tenures. In most cases, the tenure is around 6 months. However, some financial institutions offer bridging loans with extended repayment periods.
Since the tenure provides enough time to sell the borrower’s existing property and acquire the new one, it is essential to complete the repayment by the tenure’s final date.
Loan Amount
The maximum loan quantum for a bridging loan can vary. While some loan providers may give the borrower a loan of up to 6 times their monthly income, some offer loans that match the required down payment for the new property one is purchasing. Also, others will give a loan matching the sales proceeds that the borrower will get once their listed property is sold.
Bridging Loan Features at a Glance
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Compatible Scenarios
Because of its nature, a bridging loan is a significant financial package for anyone looking to commit to purchasing a new property while waiting for the sale of their previous property to go through.
Risk
There is a risk attached to bridging loans. The financial institutions will try to mitigate this risk by using the listed property you are trying to sell as collateral for your loan. Also, since some bridging loans have a tenure of more than six months, the risk might be higher.
Personal Loans
Personal loans from licensed moneylenders provide the best options to individuals as they have a faster approval process and extended repayment periods.
Interest Rates
Even though most financial loans will have a longer tenure than bridging loans, they have a higher interest rate. It is 6% APR in most cases, but it can go up to 36%. It is vital to note that things such as your credit score and ability to pay might affect the interest on your loan.
Moneylenders do not require a credit check, and the interest rate is 4% or less.
Monthly Repayments
For most personal loan packages on the market, you will get 6 times your monthly income. The monthly repayments will be equal to the tenure of the loan. These repayments will include both the principal and interest. For example, if your monthly income is $2,000, you can get a loan of $12,000. If your loan tenure is 12 months, you will have monthly repayments of $1,000 plus interest.
Loan Tenure
Twelve months is the tenure for most personal loans in Singapore. Some will offer a shorter tenure than this.
Loan Amount
Most lenders will give you access to a loan of up to 6 times the monthly salary you receive. However, some banks or financial institutions might go as high as 10 or 12 times your salary.
Features of Personal Loans at a Glance
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Personal loans can be used to finance anything. This is one of the ways they are better than bridging loans.
Risk
There is an element of risk attached to personal loans since the borrower’s income and ability to pay are the primary considerations for a loan. This is why personal loans tend to have a high-interest rate.
Personal Loans vs. Bridging Loans: Comparison Table
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Pros and Cons of Bridging and Personal Loans
There are advantages and disadvantages attached to personal and bridging loans. Here are the main ones:
Bridging Loans
Pros
- Bridging loans are an excellent option for financing the down payment for purchasing a new property.
- Rather than using personal equity, you can use your listed property as collateral.
- Some loans have a more extended repayment period, e.g., TBLP
- Loan funds from licensed moneylenders can be used to purchase any property.
Cons
- Only available for those looking to buy property.
- Bank loan funds can only be used to purchase HDB property and nothing else.
- They only cover the down payment for a new property purchase, not the entire acquisition cost. Moneylenders will only offer up to 6X of your monthly income.
Personal Loans
Pros
- It can be used for anything.
- Unsecured loans.
- More providers are available.
- Longer repayment tenure from moneylenders, i.e., 6-12 months.
- Lower interest rates from licensed money lenders.
Cons
- Most moneylenders offer only up to 6X and banks 10X your salary
- Shorter repayment tenure
How and Where to Apply for A Bridging Loan
You can apply for a bridging loan from any bank or licensed moneylender that offers the loan package options. You will have to follow the loan application procedure specified by your bank.
Eligibility and Requirements for Banks
The eligibility and requirements may be different from bank to bank. However, below are some of the most similar:
- Applicants should be employed and aged 21-65 years.
- At least one applicant must be a Singaporean citizen.
- Flats to be purchased must be listed on the HDB market.
- Have a previously owned flat that is listed for sale.
Eligibility and Requirements for Licensed Money Lenders
- At least 21 years old
- Must exercise the Option to Purchase (OTP)
- Minimum income of S$1500 for citizens and PR, $2,000 for foreigners
- NRIC
- Proof of income and employment
- Proof of residence
- SingPass to log in to CPF, IRAS, and HDB websites
- Copy of the OTP
Frequently Asked Questions
- Is a bridging loan better than a personal loan?
It depends on the use of the loan. If it is for buying a new HDB property, then Yes.
- How much can you borrow from a bridging loan?
The amount will vary depending on the bank and the value of the property you are looking to buy. Licensed moneylenders can offer up to 6x your monthly salary.
- What’s the average interest rate of a bridging loan?
Most banks’ bridging loan interest rates are between 5% and 6%. Moneylenders’ interest rates are 1-4%.
- What’s the average interest rate of a personal loan?
The average rate of interest is 5%. Depending on the bank, it can be as high as 30% or more. Moneylenders’ interest rates are 1-4% per month.
Closing
Although there are similarities between personal and bridging loans, there are also significant differences. The choice between the two suitable options depends on the borrower’s needs.
- Personal loans are shorter-term packages that can be used, however the borrower sees fit.
- Bridging loans are specifically designed for people looking to pay a down payment for a new property as they wait for their listed property to sell.
- Personal loans can also be used as bridging loans; vice versa is not applicable.
With so many personal loans and bridging loan options available, it is understandable that one might find it hard to make the right choice. A1 Credit has one of the market’s best bridging loan and personal loan packages. Get in touch today to get a free loan quotation.
