If you’re planning to sell your property and buy a new home, you may be wondering how to bridge your monetary gap.
In such a fix, a bridging loan comes in handy. It can help you maneuver between your financial transactions with ease.
Banks and licensed money lenders in Singapore offer the cheapest financing option during this transition. You raise money for a downpayment and any other expense you may incur in the process of waiting for the old property sale proceeds.
However, before you apply for financing, it’s important to know how much is a bridging loan.
Understanding the costs you may incur during your loan application will help you get the best deal for your financial needs.
A bridging loan means a short-term loan. It offers you a chance to sell and buy property simultaneously. In other words, it helps bridge the gap between the sale of an old property and obtaining a downpayment for the new property purchase.
While a bridging loan in Singapore will offer a short-term financing option, it has higher interest rates compared to other loan options.
However, such loans have a flexible repayment period. You can repay the loan and enjoy a good deal as you await the property transaction process.
There are two options you can choose from to finance the downpayment of your new property purchase as you await the sales proceeds of the old property:
1. Capitalised interest Bridging Loan
2. Simultaneous Repayment Bridging Loan
Capitalised Interest Bridging Loan Vs Simultaneous Repayment Bridging Loans
Capitalised interest bridging loan amount covers the entire cost of the purchase of your new property. Your repayments don’t start until you sell your old home. Thus, the downpayment of your new home starts after you sell your old property.
The simultaneous repayment bridging loan option requires you to make payments simultaneously. You pay the bridging loan plus your home loan.
While the two are good options, you need to choose the option that is more favourable.
The only major difference between the two is that for capitalised interest bridging loan, you don’t have to struggle to pay off your home loan and bridging loan at the same time.
You clear your principal amount plus the resulting interest. But in the end, you pay high interest. On the other hand, simultaneous repayment option may overwhelm you. But, you enjoy less interest.
The amount of the bridging loan is determined by your net proceeds plus the approved CPF balance from your old property sales proceeds.
Normally bridging loans are to be settled within a maximum of six months. Banks consider these loans risky. As such, they attract higher interest ranges of between 5-6% p.a which vary depending on the bank.
Licensed money lenders’ interest rate is up to 4%. The repayment period may range from one month and may extend to when your old property gets sold.
But this again depends on the money lender you choose. Again, taking longer to pay the loan means your overall interest amount will be high.
If your bank denies your bridging loan application, you can choose a licensed money lender. It will allow you a maximum loan amount of six times your monthly income.
The Monetary Authority of Singapore allowed a set limit of 75% of LTV. If your old property sale proceeds cover your bridging loan, you can get a 20% as the maximum amount of your property value. You can then use such amount to lower your loan-to-value (LTV).
Bridging loans give you a competitive edge when you want to buy a home. You can borrow less from banks. The fact is if you intend to purchase a home, you are required to pay the purchase amount in full.
The percentage of your property cost to pay will be determined by your LTV ratio.That’s when a bridging loan becomes an option to lower such a ratio.
Below is an example for a better understanding.
Let’s assume your new property purchase price is $1,000,000 and your loan quantum is $750,000, you will have an LTV value of 75%.
Your new property purchase needs a downpayment of $250,000 (5% cash and 20% cash and or CPF funds). Assume your old property sales proceeds are likely to be $500,000.
In this case, you may take a bridging loan of $200,000 as the downpayment. Take $50,000 from your savings and add to the $750,000, and you will manage to purchase your new property.
Conversely, you can take a bridging loan of your expected old property sales proceeds amount of $500,000 instead of $200,000 which lowers your LTV ratio from 75% to 45%
You can borrow up to 25% of the new property purchase price. But you must have enough sales proceeds from your old property.
A proper property valuation will help you know what to expect from your old property sales proceeds. Any undervaluation may result in a fatal mistake and you may not be able to meet your monthly repayment. Worse still, your loan amount to be approved may change.
To know how much is a bridging loan; you need a loan calculator. It will help you have an accurate cost of your loan.
Your housing loan calculator in Singapore helps determine what to take home to help meet your financial needs.
Generally, what to receive depend on the value of your property and any other loan you may be servicing.
You will have a clear idea of what amount you can borrow, loan tenure, the bridging loan interest rates etc. You will also know what to pay back.
If you have decided to take a bridging loan in Singapore, it’s vital to know what to consider.
Below is what you need to consider before you apply for a bridging loan in Singapore:
The total costs may include the interest, processing fees, property valuation expenses, and any other related costs you will incur when applying for the loan.
With a short term of not more than six months, you will spend less time on debt. Nevertheless, you will have to pay a high bridging loan interest rate.
Since this depends on the lender, you can compare different lenders and choose one with good deals. Note that in case of default, you will incur late payment fees and other charges.
When you apply for a HDB bridging loan, your bank will use your property as collateral. It implies that your lender may sell off your property if you fail to meet your repayments within the stipulated time.
A licensed money lender may not require any collateral.
Bridging loans are meant to serve short-term needs. Before applying for a loan, make sure you can repay the loan and you have enough time for your old property sale.
If you get the loan from a bank, the repayment period may not extend beyond six months. If this is not ideal in your financial situation, you can choose a licensed money lender and enjoy a flexible repayment option.
To avoid late fees and other charges, adhere to the monthly repayments as set in the loan agreement.
Also, make sure to request a quote from your lender to learn more about your bridging loan terms and conditions.
Once sure of what you’re getting into, you can now apply for a bridging loan.
To have a successful application process, you need to be eligible for the loan. Besides, you need the necessary documents as follows:
Any Singapore citizen/PRs above 18 years are eligible for a bridging loan. Lenders may also require you to have a good credit score.
One must have an OTP (Option To Purchase) document. Outstanding banks statements, CPF withdrawal statements, and proof of residence may also be needed.
Before you apply for a bridging loan, note down the lender’s guidelines and compare a few lenders. This helps you to know whether the repayment method is feasible and whether your lender has the best deals.
Getting a bridging loan is overwhelming, especially if you don’t have information on how much is a bridging loan.
It offers fast application and approval to help you settle your financial needs quickly.
A bridging loan is a short-term loan meant to help people bridge the gap between the sale of an old property and the purchase of a new one.
Some lenders may approve your loan within 24 hours. But the time taken mostly depends on your lender. Licensed money lenders may even approve your loan within an hour, but banks may take longer due to their stringent eligibility criteria.
Personal loans are a better alternative to bridging loans. You can use such loans for numerous reasons such as starting a business, or debt consolidation among others.
Besides, they have a longer loan tenure which may go up to seven years.
What you can borrow depends on your property value and your income.
However, you can borrow up to 25% of your new property purchase price provided your old property sales proceeds will be enough to pay off the loan.