What Is A Bridging Loan And Should You Apply For It?
September 16, 2022
Assume you want to upgrade your property and have already signed the sale with the buyer of your old home and a purchase agreement for your new abode.
This means you’ll have to pay a deposit for your new home.
But what if you don’t have the cash on hand and haven’t received the proceeds from the sale of your previous property?
That’s where the need for applying for a bridging loan from your bank or money lender comes in to bridge this gap.
If you’re still wondering what is bridging loan, here is all you need to know about a Singapore bridging loan.
What Is A Bridging Loan?
A bridging loan is a short-term loan.
You typically seek it from your bank or money lender to enable you to pay for the downpayment when acquiring a new property – and before you receive the proceeds from the sale of your previous home.
If you’re in the process of buying a new home while also selling your old one, you’ll probably apply for a bridging loan in Singapore to fill the financing gap.
By applying for a bridging loan, you can raise money and make the necessary payments for the new and/or existing property.
In Singapore, it is usually used by individuals who want to sell their old flat to upgrade or downgrade.
It may take a while before the buyer credits the funds to your account.
Hence, this loan comes in handy for paying the downpayment and other purchase-related expenses such as legal fees.
There are two types of bridging loans that you may choose from.
Capitalised Interest Bridging Loan
With this type of loan, the entire cost of the new home you intend to buy is covered by the bridging loan.
Loan payments won’t start until your old home has been paid.
As a result, you are not required to make the downpayment and mortgage payments at the same time.
If you don’t want to struggle to balance two loans at the same time, this is the best bridging loan you can use.
But the high interest and the longer selling time can make the repayments unaffordable. Therefore, you should consider its merits and demerits before using this payment method.
Simultaneous Repayment Bridging Loan
This bridging loan works the opposite way, where you are required to repay your home loan at the same time as the bridging loan.
Paying the two can be quite tedious and stressful.
However, if you want to pay less interest on your bridging loan, it can be a good option.
How To Apply For A Bridging Loan
In Singapore, while almost every bank follows the same procedures and eligibility criteria for bridging loans, some will have specific requirements that you must follow.
For HDB financing, banks usually require your latest Central Provident Fund (CPF) withdrawal statement, Option to Purchase (OTP) document and latest bank loan statements.
You can also opt to get a bridging loan from a licensed money lender.
There are a number of benefits of using a licensed money lender over a traditional bank loan for HDB.
For example, the loan will be unsecured, which means you won’t have to offer your current home as collateral.
In addition, the processing period is faster.
To qualify for an HDB bridging loan, you must:
- Be a Singaporean or a PR and be above 18 years of age
- Earn $1,500 per month for a Singaporean and $2,000 for a foreigner
- Have exercised the Option to Purchase
- Provide all supporting documents to verify your nationality, residence, income and employment status and use your Singpass to log in to CPF.
Once you have all the above requirements and documentation, applying for a Singapore bridging loan is a simple five-step process:
- Compare up to three loan quotes from reputable lenders.
- Choose the best lender and bridging loan.
- Check that you meet the eligibility requirements.
- Send your application to the bank or money lender that best meets your requirements.
- Your bridging loan funds should be available within 24 to 48 hours.
In addition, applicants for short-term money lender loans aren’t always required to have a high credit score, making them a better option if your credit history isn’t that good.
How To Use The Bridging Loan To Lower Your LTV Ratio
Bridging loans can be used to reduce your loan-to-value (LTV) ratio when buying a new home. This is how it works.
Assume you’re buying a $1,000,000 new home through a loan of $750,000, or 75% LTV.
Your old home is expected to fetch $500,000 in sales. Assume you have already made the initial 5% cash downpayment and plan to make a non-cash downpayment of $200,000.
From the above, you have two options for lowering your LTV:
Option 1: Take A Full $750,000 (75% LTV) For Your New Home Loan
Then use the balance of $300,000 as a lump sum from the sale of your old home after repaying the non-cash downpayment of $200,000.
However, you will need to wait until your prepayment penalty period ends.
Option 2: Take A Larger Bridging Loan
You can borrow the entire expected sale amount of $500,000 instead of $200,000.
Hence, your home loan will be smaller, at $450,000, which lowers the LTV to 45%.
Once your sale proceeds are in, you can repay the bridging loan and use the $50,000 balance to pay your mortgage.
How Much Can You Borrow With A Bridging Loan?
A bridging loan covers the amount you require above the mortgage amount you are applying for.
This implies that you may borrow up to 25% of the cost of the new property, provided you will have enough money from the sale of your old property.
Hence, you can borrow the maximum bridging loan amount (25% of new home value) –as long as it can be covered by your old property’s approved and expected net proceeds and CPF savings.
Can You Use CPF To Cover Bridging Loan?
Yes, you can pay for a bridging loan with your CPF savings.
You can use your CPF savings to pay off the bridging loan once you receive the proceeds from the sales of your old property and your CPF savings are reimbursed.
But you have to pay the interest in cash.
In addition, a bridging loan accrues higher interest than your CPF account. Hence, you are better off using your CPF funds rather than taking a bridging loan if you have enough CPF funds to pay the downpayment.
What To Know About A Bridging Loan
Unlike personal loans that can serve various purposes, a bridging loan is specially designed to help homeowners acquire another home without struggling with raising a downpayment.
Here are some of the things you need to know before taking one.
Foreigners, Singapore citizens, and permanent residents who are selling their current homes in Singapore may apply for a bridging loan to acquire a new one.
For financing through banks, a good credit score is necessary in order for your application to get approved.
Your Property is Collateral
If you choose a traditional bank loan for HDB, your property will be used as security for the loan repayment.
Therefore, you must ensure that you have the ability to repay the loan on time if you don’t want to run the risk of losing your hard-earned investment.
Old Property Valuation
As a general rule, you should make sure that you are not overestimating the amount you can get for the property before you even consider applying for a bridging loan.
If the property value is miscalculated, you’ll have a lot of problems honouring the payments.
Pros and Cons Of A Bridging Loan
Whether planning to upgrade or downgrade your current home, it’s important to weigh the pros and cons before jumping in on a bridging loan.
Let’s start with the disadvantages of using this loan.
You cannot promise a HDB property seller that you will sell your home within a day and make the downpayment on another by the following day.
While waiting for your property to be sold, you can inform your seller that you are taking out a bridging loan. This way, you will have convinced the seller that the transaction will be settled in due time.
With some bridging loan money lenders, you can first pay the principal of the loan and then the interest.
In addition, you can pay off your mortgage with a capitalised interest bridge loan before interest accrues.
You’ll make one lump sum payment for all of the interest at the conclusion of the bridging loan’s term.
Using the best bridging loan, you can quickly and easily afford a new home for your family.
While you have to go through the process of selling your current home, as soon as you vacate, you won’t need to rent another home.
With a bridging loan, you have the ability to pay the downpayment and then move into your new home.
Fast Application And Approval
With either a capitalised interest bridging loan or simultaneous repayment bridging loan, your application will typically be approved by money lenders within a day or a week.
The quick process allows you to settle the matter quickly and concentrate on other things.
The monthly bridging loan interest rate is between 5-6% per annum. In comparison to a 6% rate per month on a personal loan, this arrangement is much cheaper.
A personal loan may also come with a minimum repayment tenure, before which you will be charged an early repayment penalty.
Despite the upsides of a bridging loan, it also has its share of disadvantages.
An old property does not always sell for the price you expect.
If you sold your home for less than the amount of your bridging loan, you might have to increase your property loan repayments in the future.
However, if you sell your home for a higher price, you may end up paying penalties and higher interest for possibly exceeding the term of your loan.
Bridging loans require you to collaborate with two financial institutions.
As a result, you can expect different property valuations from both institutions. This will cost you, and it may cause downpayment loan amount issues.
Mortgage interest rates are charged daily but are valued annually.
A bridging loan, on the other hand, has variable interest rates per month.
You might find yourself paying more interest under a HDB bridging loan than you would pay for a mortgage.
Alternatives To A Bridging Loan
While getting a bridging loan can be a very effective way to secure the downpayment you require to move homes quickly, there is another option you might want to take into account instead:
Temporary Loan Scheme
This is a financial assistance program provided by the Singapore government.
As with standard bridging loans, Singaporeans can now purchase a new apartment without having to pay a long-term mortgage loan.
Singaporeans and foreigners can get personal loans from banks and authorised money lenders.
Depending on your lender, personal loans from banks can cover up to six months’ worth of your monthly salary or more.
When you consider the loan amount and ease of accessing, personal loans can serve as bridging loans for borrowers who don’t qualify.
Consider Carefully If You Need A Bridging Loan
Now that you know what is bridging loan, you can see that although they can be of the same amount as personal loans, they have very different terms and conditions.
Bridging loans are also created specifically to fill the downpayment gap arising from selling one property on the one hand and buying a new one on the other.
You must also consider the applicable fees and ensure that these are within your budget.
Need a downpayment loan for a new home as you wait for proceeds from your current one?
Or apply for a loan with us now.