How A Bridging Loan Works And How To Apply For One

January 11, 2023

Have you ever heard of a bridging loan?

A bridging loan is provided by a lender on a short-term basis. It is used to bridge a financial gap until more permanent funding has been secured.

As for how bridging loan works, it provides you with the necessary funds to purchase your next home while you are still awaiting the final sale procedures for your existing property to be completed. It is typically repaid within six months.

We will explain more about how bridging loan works and what to look out for in this article.

When To Apply For A Bridging Loan

Getting a bridging loan in Singapore is applicable if:

You wish to purchase a HDB flat – in which case a HDB bridging loan can help you
You’re in the process of upgrading from a HDB flat to a private home that requires a significant downpayment. A bridging loan can provide you with the cash to complete the purchase

Types Of Bridging Loans In Singapore

There are two types of bridging loans in Singapore: capitalised interest bridging loans and simultaneous payment bridging loans.

In the case of a capitalised interest bridging loan, the total property purchase will be financed by your lender, with mortgage repayments beginning only when the sale of your old property has been completed.

A simultaneous payment bridging loan gives you the choice of paying off both the bridging loan and the new home loan in conjunction. If you pick this option, you will be given 12 months to finalise the selling of your old home before you start on the repayment of your loan.

Factors To Consider Before Applying For A Bridging Loan

To understand how bridging loan works, there are some key factors to consider.

The risk involved. You must consider if you are ready to bear the reality of a bridging loan in Singapore – getting a significant short-term loan from a bank or licensed money lender in Singapore before your current property has been sold. There is a chance that things may go wrong. What will your plan be if your sale transaction is delayed for some reason? Remember that bridging loans are usually secured with your home as the collateral. So there is a risk of losing your property.
The interest rate. A bridging loan interest rate from banks in Singapore is known to be at a higher rate than other loans. Banks typically charge 5-6% per annum for bridging loans. Licensed money lenders charge up to 4% per month.
The loan tenure. Although the tenure will vary from lender to lender, as short-term loans, the clock is really running on bridging loans. Most of them have a loan tenure of only six months. The short tenure can increase monthly repayments considerably.
Monthly repayment amounts. As mentioned, a bridging loan is secured on your home. You need to be completely sure that you can handle the repayments every month for both the bridging loan and your new mortgage.
The amount of the loan. Don’t borrow more money for this loan than you actually require. You should keep a bridging loan to a maximum of a quarter of your new property purchase price.

How A Bridging Loan Can Lower Your LTV Ratio

While you should, as mentioned above, keep the bridging loan amount as low as possible in most circumstances, it is worth discussing how a bridging loan can be used to lower your loan-to-value (LTV) ratio.

You can do this by increasing the loan quantum of a bridging loan, which will then decrease the loan amount for your home loan.

Once you have received the proceeds from the sale of your old property, you will be in a position to pay back the bridging loan, which has now facilitated the downpayment and a percentage of the home loan.

Bearing in mind how bridging loan works, you will need to calculate the costs of the high interest rate of bridging loans versus the benefits of having a lower LTV ratio.

It is recommended to have a lower LTV ratio because if you have a higher LTV ratio, you need to borrow more. To a lender, this increases your risk of default.

Hence, a lower LTV ratio is less risky for a lender. A lower LTV ratio may also increase your chances of having your home loan approved.

Pros And Cons Of A Bridging Loan

Whether you are dealing with a bank or a licensed money lender, you should consider everything before you get a bridging loan.

Here are some of the advantages and disadvantages of taking a bridging loan:

Pros

You can get the money quickly
You get a large sum at one go
Flexible repayments
Easy to secure loans on high-end properties

Cons

You risk losing your asset or property if you fail to repay your loan
Higher interest rates
Additional expenses

How To Apply For A Bridging Loan

If you’re still unsure of bridging loan works, you can seek professional advice from lenders such as licensed money lender GS Credit, which will discuss in detail with you how bridging loan works in Singapore.

You’re going to have to meet the eligibility criteria for a bridging loan, and have the necessary documents prepared. Again, speak to a GS Credit loan consultant for advice.

Eligibility Criteria

In order to be eligible for a bridging loan in Singapore, the first step is to be in good financial shape. This means having a decent credit score and history, which is no different than applying for any other kind of loan.

You can be a Singaporean, a permanent resident, or a foreigner to apply for a bridging loan in Singapore, but you must have started to sell your property.

Documents Required

To get the application process going, you must have your Option to Purchase (OTP) document on hand. Your OTP demonstrates your exclusivity with regard to buying a particular property.
To allow a lender to check your available proceeds, you should also have any outstanding bank loan statements, as well as your CPF withdrawal statements with you.

Fees And Charges

Fees and charges for bridging loans in Singapore will vary from lender to lender.

As mentioned, banks typically charge 5-6% per annum for bridging loans. Licensed money lenders charge up to 4% per month.

Hence, it’s crucial to stay on top of all your repayments to avoid damaging your credit score.

Where To Get Bridging Loans

Most banks in Singapore that offer home loans are likely to have bridging loans among their portfolio of products. However, a good credit score is of utmost importance to banks.

However, if you prefer to make use of the flexibility and speed of a licensed money lender in Singapore or if your credit score is poor, contact a licensed money lender.

GS Credit is a good place to start.