Let's say you want to upgrade your property and have done all the work until you sign the purchase and sale agreement. This means you need to remit a down payment. But what if you don't have the cash on hand and you haven't received the funds from the sale of your old property?

At that point, you can get a bridging loan from your bank (probably the same bank you got the home loan from) to bridge that gap.

Now, whether you should take a bridging loan or not seems to be a simple open and shut situation. If you have enough money for a down payment on a new property, you don't need a bridging loan. If you don't have enough cash, then you may need one.

On the surface, this seems obvious - certainly for a down payment on a new property. But if we dig deeper, there are some nuances that might make a bridging loan a better (or worse) idea. Case in point.

Whole lot sale. If you're lucky enough to have your property sold as part of a whole sale, you may need to get a new one quickly. A bridging loan can help - since a whole lot sale is quite lucrative, the higher interest rate will be a lesser burden.

Selling a newly renovated property. In this case, the cost of renovations may have depleted your cash reserves, creating a need for a bridging loan. However, another option to consider is to take out a renovation loan for the property, which may be cheaper than a bridging loan and will also help preserve your cash reserves.

Upgrade your property. This is the classic bridging loan scenario. In most cases, a bridging loan can help. But be sure to evaluate all the details first, which we'll cover in the questions that follow.

How much cash do I have on hand?

Obviously, if someone is considering a bridging loan, they don't have enough cash on hand to make a down payment. However, there are situations where someone would rather take a bridging loan to keep their cash (for example, for emergencies) and take a bridging loan instead.

Of course, this only makes sense if you keep a liquid cash-on-hand balance and not the funds in your CPF OA (which has strict withdrawal conditions).

In addition, the interest rate on your CPF funds is much lower than that of a bridging loan. This means that if you have enough money in your CPF for a down payment, you should use CPF funds instead of taking a bridging loan.

Now, there's nothing wrong with keeping your cash on hand and taking a bridging loan (it all depends on your own psychology and risk tolerance). But keep in mind that by doing so, you will have to bear the interest costs of a bridging loan.

What is the total cost that will be borne in addition to the mortgage?

The benefit of a bridging loan is that while the interest rate is high, the term is very short. This means that the total amount of interest you will pay is relatively small (especially when we consider that we are talking about real estate here).

For example, let's say you purchase a property worth $1.5 million and take out a bridging loan for the full 20% down payment - $300,000. Even assuming an interest rate of 6% and a term of 6 months, the total interest incurred would be $9,000. This is not a small amount, but it is relatively small compared to the value of the property.

That said, whether or not this is a significant amount will vary from person to person. It is important to do the calculations beforehand to make sure you know exactly how much the additional interest will cost you. Don't forget to also check for any miscellaneous fees outside of the cost of interest.

What's Plan B if the old property doesn't sell?

This can be a nightmare scenario. But it's best to be prepared. Before accepting a bridging loan, make sure you check with your banker what the exit clause is and if for some reason the sale of your old property doesn't close. Will there be any penalties?

As we mentioned, the terms and conditions may vary from bank to bank. So make sure you double check with your banker and factor these into your loan selection decision.

If you're still not sure which home loan option is best for you, you may need more personalized advice. In this case, a professional mortgage specialist is ready to answer your questions. In addition to giving you tailored advice, they can also recommend the best home loan for your financial needs.