When you are looking to purchase a new property, it is important to consider all of your financing options. One of those alternatives is a bridging loan.
A bridging loan can be a great way to finance the purchase of a new property before you sell your old one.
But how long does it take to get a bridging loan? And what are the benefits of using one? Read on for answers to these questions and more.
The meaning of a bridging loan lies in its name:
This secured, short-term financial option helps you bridge that gap between selling your current home and buying a new one.
A bridging loan is a useful financial option if you need your former property’s proceeds to purchase a new home, but these sales proceeds have not gone through yet.
Here is how a bridging loan works, step by step:
Note: The maximum tenure for a bridging loan in Singapore is six months with banks and one month with most legal money lenders.
The great thing about bridging loans is that they can be approved relatively quickly.
So how long does it take to get a bridging loan?
The approval process may take 24 to 48 hours if you apply at a bank. However, if you submit your application to a licensed money lender, the process may only take an hour.
Remember: Even if you get fast approval within a few minutes, a licensed money lender is mandated by the Ministry of Law to conduct due diligence at their headquarters. So do not accept money from someone who does not hold this official face-to-face meeting.
To understand what a bridging loan is in Singapore, you must review all your options. There are two types of such loans you can opt for:
This bridging loan alternative means the bank will give you the entire amount for purchasing your new home. After you get the money from selling your old home, you will have to repay the loan amount plus interest.
This bridging loan entails repaying it and the home loan simultaneously. The good news is you have 12 months to find a borrower for your former property.
Remember: The bridging loan’s maximum tenure is still six months, even if it takes you longer than that to finalise the sale.
Now you know what a bridging loan is in Singapore, how it works, and how long does it take to get a bridging loan. But is it your best option? To answer this question, let’s review the variables below:
The first thing you should do is compare the interest rates of banks and licensed money lenders.
Your local bank may have a bridging loan interest rate of 5-6% per annum, whereas a money lender usually requires between 1-4% per month.
Pro tip: Some financial institutions allow you to repay the interest first, without making any payments towards your outstanding loan balance until after you sell the original property.
Remember: You can use your CPF to repay your bridging loan, but the interest must be reimbursed in cash.
You should also consider whether you can repay the bridging loan installments comfortably.
Pro tip: It is crucial to have a buffer, just in case the sale of your former home takes longer than expected.
If you are tight on cashflow, you might consider other options such as personal loans, which have lower interest rates and longer repayment periods.
One reason many people take bridging loans is because they do not have enough liquidated cash for the downpayment of a new property.
Warning: Using your CPF Ordinary Account (OA) for the downpayment may be a better option. The reason lies in the interest rate:
Your CPF OA has a lower interest rate than a bridging loan.
Besides, getting the money from your CPF means you can avoid some of the bureaucracy associated with applying for a bank loan. And you do not need to have a good credit score to use that CPF.
The maximum amount you can borrow from a money lender is six times your monthly salary. In contrast, banks will only lend you up to 25% of the property’s purchase price, regardless of how much you earn.
Remember: Do not loan more than you genuinely need, or you will pay a higher loan cost.
Bridging loans in Singapore usually have a tenure that does not exceed six months. If you are sure you can sell your former home within this timeframe, then it is an excellent option.
If you are unsure whether you will be able to sell the property in six months or less, it may be best to consider other alternatives, such as refinancing your home loan or taking out a personal loan.
The key risk when taking a bridging loan is if your former home’s sale falls through. In this case, you may have to settle the loan fully, even if it is just a month’s loan.
Alternatively, the bank or licensed money lender may seize the property you have used as collateral for this bridging loan.
Pro tip: To avoid this situation, ask your money lender about exit clauses and penalties.
If you are looking for a way to lower your loan-to-value (LTV) ratio, there are two ways in which you can leverage a bridging loan for that purpose:
Let’s say you plan to purchase an $800,000 property. The bank grants you 70% of that, meaning $560,000.
The downpayment is $240,000, $40,000 of which must be in cash. Let us say you expect $400,000 in sales proceeds from another property.
Both options lower your interest, tenure, and overall loan costs, but there are disadvantages to both:
The primary advantage of a bridging loan is that it offers fast approval and funding, which is ideal if you are amid property transactions.
Other significant benefits are that you can borrow a substantial amount of money and have plenty of flexibility surrounding the repayment.
The main drawback of a bridging loan is the high interest rate.
The other essential concern is that you may have to settle the loan in full if you cannot sell your previous property within the given timeframe.
You can apply for a bridging loan from banks and licensed money lenders. Remember to compare the interest rates and terms first and check if you are eligible for the loan in the first place.
To apply for a bridging loan:
A bridging loan is an excellent way to fund your property transactions if you:
If you conclude that a bridging loan is not your best option, 1AP Capital can help you with customised personal loans, emergency loans, and more.
After all, there is nothing worse during a property transaction than making rash decisions.