What Is A Bridging Loan And Should You Apply For It?
October 10, 2023
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.
Take Note: This article discusses property bridging loans, which assist homeowners and purchasers when they sell and acquire property at the same time. This is not to be confused with the Temporary Bridging Loan Programme (TBLP), which is a program that assists businesses in obtaining operating capital.
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.
Exploring the concept of bridging loans and their benefits? At GS Credit, we offer comprehensive loan solutions to bridge your financial gaps. Apply for a loan with us and let our dedicated team assist you in securing the funds you need, when you need them.
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.
|Property and Loan Details
|Price of New Condo
|Bank Loan (75% LTV)
|Cash Downpayment (from own funds)
|Excess after Repaying Bridging Loan
|After the prepayment penalty period, repay $300,000 of the loan in a lump sum.
|Use the sales proceeds to repay the bridging loan, which bridges both the downpayment and part of the home loan.
|Possible prepayment penalty.
|Higher bridging loan interest due to increased quantum.
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
|Maximum amount for bridging loan
|The net revenues and CPF balance from the authorised sale of your prior property determine the maximum amount of the bridging loan.
|Maximum term for a bridge loan
|The loan must be paid back in full within six months.
|Bank Interest rates
|The interest rate is up to the bank’s discretion, although it often ranges between 5% and 6% annually.
You may have read somewhere that bridging loans have a maximum amount of 20% of the property value (being the non-cash downpayment element of a non-HDB loan). That is certainly the most prevalent occurrence in practice.
But in truth, as long as the sales revenues from your prior home can pay it, you may have that restriction authorised – and even utilise it to acquire a lower Loan-to-Value (LTV) ratio as well.
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.
Is Getting a Bridging Loan a Smart Move? 4 Vital Points to Take Note
At first glance, deciding whether to take a bridge loan might seem straightforward. If you have sufficient funds for the down payment on your new property, you don’t need a bridge loan. If you’re short on cash, then you might need one. While this is true from a broad perspective, it doesn’t fully address two key questions:
- Is a specific bridge loan the right choice for you?
- Should you explore other options, even if you don’t have enough for the down payment?
By considering the following questions, you can better understand your options and make a more informed decision.
1. What Motivates Me to Take a Bridging Loan?
At face value, the purpose of a bridge loan is to finance the down payment on a new property. However, a closer look reveals nuances that can make a bridge loan more or less suitable. For example:
- Combined Sales: If your property is part of a profitable en bloc sale, a bridge loan could be beneficial. The higher interest rate may not be as burdensome given the profitability of en bloc sales.
- Selling Recently Refurbished Real Estate: If you’ve recently renovated your property, you might have depleted your financial reserves, making a bridge loan necessary. An alternative could be a renovation loan, which might be more cost-effective.
- Enhancing Your Home: This is the typical scenario for a bridge loan. While they can be helpful, it’s crucial to consider all the details, which leads us to the next question.
2. How Much Money Do I Have on Hand?
If you’re considering a bridge loan, you likely don’t have enough cash for the down payment. However, you might opt for a bridge loan to preserve your cash reserves for emergencies. This strategy makes sense only if you’re preserving liquid cash, not CPF funds, which have lower interest rates.
3. What Are the Total Costs Associated with Taking This Bridge Loan?
Bridge loans have high interest rates but short tenures, meaning the total interest paid is relatively low. It’s essential to calculate these costs upfront, including any additional fees.
4. What Is My Backup Plan? What Happens If the Sale of My Old Property Fails?
It’s crucial to have a contingency plan. Before taking a bridge loan, consult your lender about the exit clauses and potential penalties if the sale of your old property doesn’t go through.
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.
Unpacking the nuances of bridging loans? GS Credit is at the forefront of providing tailored loan solutions to meet your interim financial needs. Apply for a loan with us and navigate your financial transitions with confidence and ease.