Are you thinking of buying a new home but still have outstanding mortgages to settle? Then a bridging loan might be just what you need.
Bridging loans can be an important part of a homeowner’s financial plan when purchasing property. But how does a bridging loan work and how do you know how much you’ll get?
Find out why it can be a viable option and how to calculate bridging loan in this article.
What Is A Bridging Loan?
Bridging loans are a type of short-term loan that can help you get the funds you need to purchase a new home even before you have sold off your old one.
Also referred to as bridge loans or bridging funds, they are used to pay for the costs associated with buying a new home.
A bridging loan can be useful if you need money now but haven’t received your first mortgage loan yet. With this type of loan, you can move into your new home before the sale of your old one is completed.
However, a bridging loan is meant to be paid off after a short period. This is why it is important to assess your capacity to pay it off.
What To Note About A Bridging Loan
Here are some points to note about a Singapore bridging loan:
Usually, you can get 20-25% of the value of your home through a bridging loan.
This depends on how much you really need and can afford to pay back. You can use this amount to pay for the downpayment of the new property.
The loan tenure refers to the period over which you must repay the loan.
Typically, bridging loans have a six-month repayment period. So before applying for a bridging loan in Singapore, ask about the loan tenure and make sure there is adequate time for the sale of your property to be completed.
While banks in Singapore charge higher bridging loan interest rates of 5-6%, licensed money lenders offer competitively lower rates of up to 4%.
It is important to note that these rates can change depending on the lender and market conditions. It is wise to shop around for the best rates by comparing different lenders.
How To Calculate Bridging Loan
Knowing how to calculate bridging loan allows you to weigh your ability to repay it.
It will give you an estimate of the interest rate, the amount you can borrow, the gross amount, and the total cost. The gross amount refers to the principal amount plus interest, or the amount you’ll repay in the end.
Doing your calculations enables you to set your budget to cater for the loan should your old home take longer than expected to get sold.
To calculate a bridging loan, start with the following information:
- Loan amount and term
- Interest rate
- Principal repayments required every month
Divide the total amount payable by 12 and multiply it by your repayment schedule (e.g. if you make monthly payments of $100 per month, divide that number by 12 to get 0.1).
Once you have this figure, multiply it by the number of months until the payoff is reached so that you know how much interest will be charged over time. If there’s no remainder after this calculation, then congratulations. You have done your calculations correctly.
Alternatively, you can use a bridging loan calculator online to give you a definitive amount of your gross amount, net amount, total interest rates to be repaid, and the LTV ratio.
Here’s an example of how a bridging loan is used.
What To Consider Before Getting A Bridging Loan
It is important to ensure that a bridging loan is right for your needs. Before applying for a bridging loan, consider the following:
Total Cost Of The Loan
It is important to calculate the total cost of the bridging loan and compare it across different lenders.
Now that you know how to calculate bridging loan, you’ll need to include all the fees, rates, and charges associated with the loan. When you have the total cost, you can choose the best deal.
Interest rates vary from one lender to another. So ensure that the rates charged for the monthly repayments are flexible and fit your budget.
Make sure that your monthly installments are not too high as you may default on the loan if you can’t manage, and incur more charges.
Banks can offer a maximum LTV ratio of 75%, while HDB’s LTV is 80% as of 30 Sep 2022.
Before getting a new home loan in Singapore, your old home will have to be assessed for its market value. To get the best price, hire a professional valuer so your home won’t be undervalued.
This will give you a reasonable idea of what to expect so you won’t be short-changed.
Fee And Charges
This fee will depend on how complicated your case is and how much work you need to do yourself.
For example, suppose you want immediate approval from the bank instead of waiting for it to approve your application after reviewing all necessary documents from its end.
In that case, this might cost you more money than usual due to the urgency.
This is charged when you delay repaying the loan. In line with Singapore’s laws, the fees and rates charged on loans cannot exceed the principal amount of the loan.
What Are The Requirements For Getting A Bridging Loan?
In Singapore, you can get a bridging loan from a bank or licensed money lender, although their criteria differ. In general, you must meet the following eligibility criteria and requirements:
- A Singaporean or permanent resident (PR)
- At least 21 years old
- Have a valid CPF account
- Received the Option To Purchase (OTP)
- Employed and earning at least $1,500 for PRs and $2,000 for foreigners
- Proof of residence
- Proof of income and employment
- Copy of the OTP
A bank is likely to take longer to approve your bridging loan application as compared to a licensed money lender like U Credit, a trusted licensed money lender in Singapore.
If you intend to apply for a bridging loan from a licensed money lender, you’d need to follow these steps:
- Visit its website.
- Fill up the application form.
- Provide all the needed documents.
- Submit your application.
- Wait for your application to be approved.
It’s a quick process that only takes a few minutes. Alternatively, you can visit the lender’s office in person to apply for the loan or seek consultation.
Make Sure You Know How To Calculate Bridging Loan
You don’t have to wait till your old home is sold off for you to buy a new one. With a bridging loan, you can get funds for the down payment for your new home.
But bridging loans are short-term and have a high interest rate, so make sure you can afford the monthly installment before you apply for a bridging loan.
Before you do so, learn how to calculate bridging loan to get a clear idea of how much you’ll have to repay.