Most Singaporeans live in HDB flats. However, some may decide to sell their homes and upgrade to private property.
If you’re thinking of doing that, there is one hurdle. The selling process takes time – hence, you may not have enough money to purchase a new home immediately. During such times, you can take out a bridging loan.
However, it is essential to understand how bridging loan works to make the right decision.
In this article, you will learn what a bridging loan is and how it works, how to apply for one, and the requirements needed to qualify.
Many are familiar with home loans but may not know what is a bridging loan.
A bridging loan is a type of loan you can get to cover the costs of buying a new property as you await the sale of your old home to go through. It provides capital for the downpayment and other expenses you may incur when buying a new home.
A bridging loan in Singapore is short-term because most lenders offer a repayment plan of not more than six months. You can borrow up to 25% of the price of your new home as long the sales proceeds of your old property can cover this cost.
There are two common types of HDB bridging loans. These are:
This type of bridging loan pays for the entire cost of your new property. You will start repaying the mortgage once you have sold your old home. It is a good option if you don’t want to pay two loans at the same time.
If you take out this loan, you will repay your home loan first, then the bridging loan. You will be given 12 months to sell your old property and begin your repayment term.
Having a lower loan-to-value (LTV) ratio is a plus for you as a borrower. If you have a higher LTV ratio, you can borrow more. Thus, the risk of default is also high.
You can take advantage of a bridging loan to lower your LTV ratio by providing the capital you require to settle the downpayment. This will reduce your loan amount, and in turn, lower your LTV ratio.
So let’s say you want to buy a new home worth $1,000,000 and qualify for a $750,000 (75% LTV) loan quantum. On the other hand, you are selling your old property at $500,000, but have yet to sign the deal and have the money at your disposal.
You can decide to take a HDB bridging loan worth $200,000 to cover the non-cash downpayment and get $50,000 from other sources.
With this, you can lower your LTV in two ways:
1. Take a $750,000 loan. Once you receive your old property’s sale proceeds ($500,000), you settle your bridging loan worth $200,000. You will then have $300,000 left, which you can use to repay part of your debt after the prepayment penalty period ends.
2. Or you can take out $500,000 as your bridging loan instead of $200,000. Hence, you will only require to borrow $450,000 to cover the downpayment of your new property. This lowers your LTV to 45%.
After knowing how bridging loan works to lower your LTV, you can approach a lender.
The best time to borrow is when you want to move into a new home, yet you don’t have the funds to settle the downpayment with because you haven’t completed the sale of your old property.
It is essential to note you will need to use your property as collateral if you are dealing with a bank.
Before sending a loan application to the bank or licensed money lender, you should consider the following:
The bridging loan interest rate is higher than that of a home loan.
Most banks charge between 5-6% per annum. This makes it quite expensive to service, especially if you also have a mortgage.
However, some banks will allow you to settle the interest first then pay off the loan once you get the sales proceeds from your property.
How much can you afford to repay every month? Do you have some savings that can help if your employment is cut short or your business is poor?
It is crucial to consider these questions before approaching a lender. This is because you need to pay off your bridging loan as agreed with the lender.
A HDB bridging loan is a short-term loan, usually up to six months. However, this depends on the lender you are working with.
Therefore, weigh the interest rate and the amount you want to borrow to see if you can cover the monthly payments within the stipulated time.
How much should you borrow? For a bridging loan, you can get up to 25% of the purchase price of your new property as long the sales proceeds of your old house can cover it.
However, do not take out what you qualify for – instead, consider only the amount you need to have to settle the downpayment and other housing transactions.
This is because the interest rate for this loan type is high, and the loan term is short.
Going for a bridging loan means you will give your home as collateral in most cases. Besides, you are getting the loan before finalising the sale of your old home. What if it fails? There is also a risk in paying a high interest rate within a short time. You should consider your finances carefully and have a Plan B if you fail to sell your old property.
Once you have understood how bridging loan works, considered the rates, amount, and risk, and still feel it is a good idea, you can send your application.
Here are the steps for applying:
The first step is to find a bank or a legal money lender to work with. You can do your research to get a lender with favourable interest rates or other loan terms.
Also, ensure that you are working with a licensed money lender because if you go with a loan shark, you will be overcharged.
After finding the best lender to work with, you must submit the required documents and application form.
The application form will provide your personal details, such as your full name, email address, and contact details.
You must also attach the following documents:
After the lender receives your documents and application, it can accept or deny your application, depending on the eligibility criteria.
It will also do background checks to weigh the risks of lending you the money. Banks won’t give you a loan if you have a bad credit score.
On the other hand, licensed money lenders are rather lenient when it comes to credit ratings. Whether you are a Singaporean or a foreigner, you can qualify for a bridging loan in Singapore if you have met the eligibility criteria.
If you meet the lender’s requirements, it will approve the loan. After receiving the money, ensure that you repay according to the contract. Failure to do so leads to late payment penalties and lowers your credit score.
The loan comes with additional expenses apart from the bridging loan interest rate.
For example, lenders will charge you a late fee if you fail to repay the loan on time. Usually, the late payment fee is about 3-5%, depending on your lender.
Banks give a grace period of 15 days. However, do not be complacent. Instead, make your payments on time to avoid affecting your credit rating.
Borrowers in Singapore can source a HDB bridging loan from the following lenders:
Banks providing home loans would also offer bridging loans. Therefore, you can send your loan application to the bank providing your home loan.
Some of the banks offering this loan type include:
Since banks have stringent requirements, you may not qualify for a bridging loan. In fact, banks will deny your loan application instantly if you have a bad credit rating.
For such reasons, you can approach a licensed money lender in Singapore. Many legal money lenders may not look into your credit rating.
Instead, they check on your income and employment. As a result, their approval processes are more lenient than that of banks.
Also, licensed money lenders operate under the Ministry of Law in Singapore. Therefore, they have to provide their services according to the provided guidelines. If they are found guilty of misconduct, fines will be imposed.
A legal money lender is not allowed to call you via the phone or send you a text message to advertise its loan services. Instead, it can only advertise on its official website, business directories, and adverts placed within or on the exterior of its business premises.
Also, such money lenders should have a physical address where you can meet and have a face-to-face verification.
Therefore, if a money lender communicates with you via social media or phone calls to approve your bridging loan in Singapore, you can report them to the Ministry of Law.
Finally, the law protects you when dealing with a legal money lender. If you cannot repay your loan on time, the lender should not cause you any harm, and insult or abuse you. It is also not allowed to take your property unless a court of law orders so.
According to the Ministry of Law, there are more than 100 licensed money lenders in Singapore to choose from. A perfect example is 1AP Capital.
Anyone planning to move their family from a HDB flat to private property in Singapore can apply for a bridging loan.
The loan helps them bridge the financial gap needed to secure the new home as they wait for the sale of their old home to go through. This is how bridging loan works.
However, before you approach a bank or a legal money lender for this loan type, you should consider the amount to borrow, loan interest rate, repayment period, and the risk involved. Once you weigh these considerations and decide to apply for the loan, you can send your application.
If you are looking for a licensed money lender in Singapore to offer you a HDB bridging loan, you can contact 1AP Capital.
You can take out up to 25% of the purchase price of your new property. All you need is to ensure that the sales proceeds from your old property can cover the loan.
The loan approval process depends on the bank or money lender you approach. The stage at which you are in the selling of your old home can also influence the process.
Taking this loan type has its pros and cons. Therefore, before you jump into making an application, kindly weigh them. This will help you to make a wise decision.
The interest rate of a bridging loan is higher than that of a home loan. It is about 5-6% per annum, depending on the bank.