Anyone who has tried to sell a property in Singapore can attest to how difficult and trying the process can be.
This is especially so if you are still trying to sell your current property but currently have your eye on another. The sale is not finalised and the proceeds are not in yet – so you don’t have enough to pay the downpayment for the new property.
This is when you may need to opt for a bridging loan to “bridge” this gap in funds. But before you apply for one, you should know how bridging loan works.
Before we explain when and why you may need a bridging loan and how bridging loan works, let’s see what the term “bridging loan” means.
What Is Bridging Loan?
Put simply, a bridging loan in Singapore refers to the money you take from a bank or registered money lender to seal the gap (bridge) between the time you are required to pay your downpayment for a new property and when you are yet to receive money from the sale of a previous property.
The loan is a short-term secured one. Most lenders give only six months to repay this loan.
The minimum repayments of your bridging loan will depend on the bridging loan interest rate. Usually, the lender will capitalise on your interest until you sell your current home.
Once you do so, the net proceeds you obtain will reduce the amount you borrowed. You will then continue to pay the remaining amount as a standard mortgage.
Types Of Bridging Loans
There are two main types of bridging loans you can get in Singapore.
Although they serve the same purpose, each comes with different terms and conditions. It all comes down to the state of your finances and preferences.
1. Capitalised Interest Bridging Loan
In this bridging loan, the bank or licensed money lender pays the full amount of your new property. You start to repay your mortgage repayments the moment you receive the proceeds of the sale of your old home.
This approach is ideal if you do not want to service two loans at the same time, which can be overwhelming.
2. Simultaneous Payment Bridging Loan
This second option gives you the opportunity to pay two loans (your HDB loan and the bridging loan) concurrently.
The only major challenge with this option is that you only have one year to complete the sale of your previous property and start the loan repayment. Without a doubt, this option is the more tedious one between the two.
How A Bridging Loan Can Lower Your LTV Ratio
Can a bridging loan help you lower loan-to-value (LTV) ratio? Well, it can. The LTV ratio refers to the percentage of your new property’s value you are allowed to borrow.
Lenders use the LTV ratio to assess the risk they will be undertaking – the higher the LTV ratio, the greater the risk.
So why should you lower your LTV ratio? It’s because if you have a higher LTV ratio, the chance of you defaulting is higher as you need to borrow more.
Bridging loans can help to lower the LTV ratio when your credit score is poor. A lower LTV ratio assures the lender of your ability to repay your debt.
A bridging loan can give you the money you need to make a downpayment on your new property. This reduces your loan amount, and consequently lowers your LTV ratio.
Bridging Loan Calculations
Let’s assume the property you are intending to own is valued at $1,200,000 but your maximum quantum loan does not exceed $960,000, which translates to an LTV ratio of 80%.
This new property needs a downpayment of $300,000, while the sale of your current home is set at $600,000. This means:
- Value of the new property: $1,200,000
- Maximum quantum amount: $960,000 (80% LTV)
- Downpayment from non-cash remittance: $200,000
- Total net proceeds from previous sale: $600,000
Now, you decide to take a bridging loan of $200,000, an amount that is enough to pay the downpayment (non-cash). Add this amount to the $960,000 you got from the bank or money lender.
Alternatively, you can apply for a bridging loan of let’s say $600,000 to pay for your home to lower the LTV ratio.
When you purchase a property, you must be ready to pay it in full. In this case, your LTV ratio is the percentage of the cost of the property.
In this case, to be able to lower your LTV ratio, consider a bridging loan as the viable option because it allows you to borrow less from a money lender or bank.
4 Factors To Consider Before Applying For A Bridging Loan
Before applying for a bridging loan in Singapore, there’re a number of things that you should be thinking about. Here are a few of those important factors you must consider:
Bridging Loan Interest Rate
Compared to normal home loans, bridging loans come with high bridging loan interest rates.
Banks are likely to charge you an interest rate of between 5-6% per annum for a bridging loan, as compared to the usual 2.15% interest per annum that you will pay for a home loan.
Licensed money lenders charge up to 4% interest per month.
Depending on the type of lender, you may be asked to pay the interest before you start repaying your bridging loan.
Usually, a bridging loan is designed to cater to about 25% of the new property’s value.
After getting a bridging loan from a money lender or bank, you will still be required to repay the money, typically within six months.
Therefore, you need to figure out where you are going to get the money from to repay the loan if the sale of your old home is not going as planned.
You risk losing the property you pledged as collateral if you can’t pay up.
As mentioned, bridging loans are short-term loans. So you need to do your math properly so that you can repay your lender in a few months.
The bridging loan tenure in Singapore varies from bank to bank and from one registered money lender to another – but in general, the loan tenure is still short.
What You Need To Apply For A Bridging Loan In Singapore
To get a HDB bridging loan in Singapore, you need the following documents:
- Proof of residence (utility bill, a letter sent to you that shows your residential address or agreement of tenancy)
- Your Singpass to sign in to your accounts namely CPF, HDB, or IRAS
- Three months’ receipts for those that are employed
- Certificate of employment
- Copy of the OTP
Once you have the documents that might be required by your bank or registered money lender of your choice, you can start your bridging loan application process and submit the relevant documents.
Pros And Cons Of Bridging Loans
Bridging loans come with several advantages and a few disadvantages.
- Quick disbursement
- Flexible loan repayment based on the lender you are dealing with
- Huge amount of money compared to normal loans
- You can grab high-end properties when you least expected
With these good things about bridging loans, you should also beware of the downsides. Here are some of the disadvantages of taking bridging loans whether you get the money from a bank or a licensed money lender.
- Extremely high interest rates
- Bridging loans often come with additional charges
- They are short-term loans, thus you will be forced to pay high monthly installments for a short time
- Bridging loans are secured loans. You risk losing your property if you fail to pay the money
Where To Get Bridging Loans In Singapore
Most banks and licensed money lenders in Singapore can offer bridging loans. Be sure to check each of the financial institutions’ terms and conditions for offering bridging loans.
If you need a bridging loan to complete your new project, contact these banks for the assistance you need:
- DBS Bank
- United Overseas Bank
- Standard Chartered Bank
If you fail to qualify for a bank loan, you can try getting a bridging loan from U Credit.
Be Clear About How Bridging Loan Works
Are you still wondering how bridging loan works?
We are here to help. At U Credit, we are willing to help you complete your project. The steps to getting your funding are simpler than you thought and we are willing to make them even easier for you.
Frequently Asked Questions
How Much Can I Borrow With A Bridging Loan?
You can use up to 25% of your bridging loan for the downpayment.
How Fast Can I Get A Bridging Loan In Singapore?
A bridging loan is short-term but the actual duration differs from bank to bank and money lender to money lender. Typically, it is granted between 24 to 48 hours as there is collateral.
Can I Use My CPF To Pay For A Bridging Loan?
You can use the refunded CPF from the sale of your property to repay the bridging loan, but you have to pay the interest in cash.