You’re stuck between selling your old property and making the downpayment for the new property. You’re out of cash because your old property is not sold yet.
What do you do? How do you get the funds to make the downpayment for your new property?
This is where bridging loans come in.
What is a bridging loan? How does it work? Should you apply for a bridging loan in Singapore?
This article will cover everything you need to know about a bridging loan.
It will also tell you how you can get started on applying for one to ease the financial burden when selling an old property and buying a new one.
What Is A Bridging Loan?
If you are wondering what is a bridging loan, it is a short-term loan that helps you bridge the gap between the time it takes to receive the proceeds from the sales of your old property to finance your new property.
In other words, it gives you the instant cash to make the downpayment for a new property while you wait for proceeds from the sale of the old one.
Let’s take a practical example.
Say you want to buy a new home valued at $1 million.
- Your bank can only advance you a loan-to-value (LTV) of 75% — which is $750,000.
- You have the first cash downpayment of 5%, i.e. $50,000. However, you still need to pay the 20% downpayment that can either be made with cash or CPF funds.
- You’re expecting $500,000 from the sale of your old home.
How do you pay the 20% downpayment — $200,000, when the sale of your old property is not finalised yet?
The answer is simple: You can easily acquire a bridging loan from the bank or a licensed money lender in Singapore to obtain the funds for making the downpayment.
Once the proceeds from the sales come in, you can pay off your bridging loan, and walk away happy.
However, note that obtaining a bridging loan comes with an interest that varies from bank to bank or money lender to money lender.
More importantly, you’re mandated to pay your bridging loan within six months.
Bridging Loan Vs Temporary Bridging Loan: What’s The Difference?
People usually use both terms interchangeably. While they are similar because they have the same concept, they are slightly different.
A bridging loan helps to finance the purchase of a new property. If you’re upgrading from an HDB flat to private property, or even a larger HDB property, a bridging loan is a great way to get the funds for your downpayment.
However, a temporary bridging loan is a government programme that provides working capital for businesses.
The programme has been extended to Sep 2022. If you have a business, and you need working capital, the temporary bridging loan programme is a viable option.
Types Of Bridging Loans
There are two types of bridging loans. They include:
- Capitalised interest bridging loans, and
- Simultaneous payment bridging loans
Capitalised Interest Bridging Loans
In the case of capitalised interest bridging loans, the interest on the bridging loan is added to the principal.
Hence you don’t have to pay monthly interest on the loan. The loan provider (bank) pays the total purchase of your new house or property.
The mortgage payment for your new home begins once the proceeds from your old home have been realised.
With a capitalised interest bridging loan, you can avoid servicing two loans at the same time (the bridging loan, and the mortgage for the new property).
However, this type of loan is usually more expensive as a higher rate is charged.
Simultaneous Payment Bridging Loans
For this type of bridging loan, you’re required to pay both your bridging loan and your new mortgage at the same time.
This can get a bit overwhelming, but if you can get your current property sold on time, you can pay off your bridging loan, and be left with only the mortgage to pay.
Note that the above types of bridging loans only apply to banks and not money lenders.
How To Apply For A Bridging Loan
One way to apply for a bridging loan is via the bank.
Usually, banks that offer home loans will also offer bridging loans. The interest rate and other fees for the bridging loan will vary from bank to bank.
However, bridging loan interest rates are typically around 5% to 6%, and the maximum tenure for the loan is usually six months.
Another great option to apply for an HBD bridging loan or for other forms of property is via licensed money lenders.
This option is highly considered because of its flexibility and ease of acquiring the loan.
For instance, while banks may consider your credit history, licensed money lenders may not.
Another benefit is that because of the flexibility you enjoy when borrowing from money lenders, you can get a few days to settle the downpayment for your new property.
Although licensed money lenders charge an interest fee on bridging loans, the fee is capped at 4%.
This is because money lenders are mandated by the Ministry of Law to not exceed 4% on the interest rate for loans.
This means you might even be getting a better deal borrowing from a money lender rather than a bank with an interest rate of 5-6%.
Just as with banks, the fees and rates charged for the loan will vary between money lenders. It’s advised you do your due diligence to get the best rates for your bridging loan.
U Credit offers short-term bridging loans to individuals looking for funds to finance the downpayment of their new homes.
How Much Can You Borrow With A Bridging Loan?
Typically, bridging loans can cover any amount that exceeds the LTV you apply for.
Since most banks that provide home loans offer an 80-75% LTV, this means you can borrow up to 25% of the new property value.
For money lenders, you can borrow up to six times your monthly income if your annual income is at least $20,000 and above for unsecured loans.
While secured loans have no capped amount, you will need to use your property as collateral.
Most money lenders only approve the application for a bridging loan when an “Option to Purchase” (OTP) is presented.
An OTP is a contract between a buyer and a seller that indicates that you have already found a buyer for your property.
Costs Associated With A Bridging Loan
Understanding the costs associated with a bridging loan is crucial.
This way you know upfront what you’re getting into, and if you’ll have the capacity to pay back.
The table below shows the cost associated with a bridging loan from a bank or licensed money lender.
|Interest rate||Admin and other fees||Late Payment fees||Exit Fees||Loan Tenure|
|Banks||5-6%||Decided by the bank||3-5% with a grace period of 15 days||1% of loan amount||Six months|
|Money lenders||1-4%||Capped at 10%||Capped at $60||Decided by the money lender||One to six months, or until the property’s completion date|
How To Use The Bridging Loan To Lower Your LTV Ratio
Most people stop at borrowing just the downpayment required to finance their new property.
But do you know you can use a bridging loan to reduce your LTV ratio?
The LTV ratio is a restriction placed by the Singapore government to place a restriction on the amount individuals purchasing a property can borrow from the HBD or bank.
The LTV is capped at 80%.
A low LTV ratio means you’re borrowing less, and investing more cash in the home you’re buying.
Lenders see that as a plus, and this can attract a low interest rate on your mortgage.
So how do you use a bridging loan to lower your LTV ratio? Let’s take a practical example.
Going back to our previous example, assuming you want to purchase a home for $1 million.
- HBD financing or bank loans offers an LTV ratio of 75%. This means the maximum they can lend you is $750,000.
- You have a 5% cash downpayment of $50,000.
- An additional downpayment of $200,000 needs to be paid, and
- Expected proceeds from selling your old home is $500,000.
At this point, you have two options:
- Obtain a bridging loan of $200,000, and still have an LTV ratio of 75%.
- Obtain a larger bridging loan, but not exceeding the expected proceeds from your home, e.g. $500,000, and reduce the LTV ratio to 45%.
If you go with option 1, you still have to borrow $750,000 from the bank or use HBD financing.
However, with option 2, you only get to borrow $450,000, which may attract lower interest fees.
That said, the bridging loan interest rate might be higher because of the large amount.
Can You Use CPF To Cover Your Bridging Loan?
Yes. Once your CPF savings are refunded after the sale of your old home, you can use your CPF to repay the bridging loan.
However, the bridging loan interest needs to be serviced with cash.
Should I Take Out A Bridging Loan?
While a bridging loan is a quick fix for getting you out of a jam in the event you need to finance a new property, it can also be a tricky one, considering that the time for repayment is short, and costs can pile up.
Before you take out a bridging loan, consider:
Will you be able to pay out the interest rate every month on the lender’s terms?
Remember in the process of buying a home, you’ll spend a lot. Delaying payments will only lead to more fees.
How much will you be required to pay each month? Figure out the numbers so you can plan ahead. Will your income be sufficient to cover the monthly payments?
The Loan Amount And Loan Tenure
You want to only borrow an amount you know the proceeds of your old home can cover.
In the event your house proceeds fall short of the borrowed amount, this might attract more fees. You still have your mortgage to pay.
The loan tenure is worth considering too. What if you don’t manage to sell your home before the typical six-month period? Are there fees attached? Ask yourself these questions.
Have A Plan B
Sometimes things can go south, and your plans may not always pull through.
What is your next course of action? In addition, understand the exit clauses in the loan contract, as well as the penalties and fees they incur.
Alternatives To A Bridging Loan
Another issue to think about: Can you finance the downpayment of your new property without a bridging loan? Let’s consider some options.
If you have a good credit score, you might be able to get a personal loan that is secured by your personal assets.
Money lenders may not consider your credit history before they give you a loan if you want an unsecured loan.
Home Equity Loans
Home equity loans allow you to borrow against the equity of your current home. You can use this fund to finance your new home.
Interest rates are usually cheaper, however, you will now have two mortgages you are paying for.
Get A Bridging Loan Today
If you need funds to finance the downpayment of your new home, U Credit offers loans up to six times your monthly income at affordable interest rates.
Frequently Asked Questions
Are Bridging Loans Expensive?
Bridging loans are more expensive than standard loans because the loan tenure is shorter, which increases the risk of default.
How Quickly Can I Get A Bridging Loan?
Getting a Singapore bridging loan will vary from loan provider to loan provider. In general, money lenders have a quicker turnaround time than banks do.
Can I Get A Bridging Loan With A Bad Credit History?
It depends on the loan provider. Banks typically consider your credit history before they give you a loan.
However, licensed money lenders will refer to the expected sales proceeds before they give you a loan.