In Singapore, a home is not only a necessity, but an investment.
If you’re thinking of selling your current home and purchasing a new one, you’ll most probably apply for a bridging loan.
So what is a bridging loan?
A bridging loan helps you bridge the financial gap, raise funds, and clear the required payments for your existing and new homes.
In Singapore, a bridging loan is taken by those looking to sell their old homes for either an upgrade or a downgrade.
As you wait for the sale proceeds, you can use a bridging loan to pay for the downpayment and other expenses linked to the property transaction.
This guide covers everything about property bridging loans, which help buyers and homeowners sell and buy property simultaneously.
Note that you shouldn’t confuse this with a Temporary Bridging Loan Programme (TBLP), which helps businesses access working funds.
A bridging loan is a transient loan. It bridges the gap between the time required to pay the downpayment for the new property and when you get the sales proceeds from your previous home.
It is also known as a HDB bridging loan.
A HDB bridging loan allows you to purchase a HDB flat without worrying about missing the opportunity as you await the net proceeds from selling your previous property.
Let’s look at the key features of an HDB bridging loan:
It’s important to note that a bridging loan is designed to be repaid within a short period.
Therefore, assessing your ability to repay the loan on time is essential, especially if you intend to get a loan from money lenders in Singapore.
Here are the steps required:
Singapore citizens, permanent residents, and foreigners selling their properties qualify for a bridging loan.
For a higher chance of approval, you need:
To start your application, you need to have the following documents:
A late bridging loan repayment attracts a penalty of between 3-5% depending on your bank.
This is quite steep, especially when compared with standard home loans. However, most banks give a grace period of 15 days, so you have enough time to repay your loan.
So it’s crucial to understand the loan contract, and check the applicable fees and charges with money lenders.
Weigh the advantages and disadvantages of a bridging loan before you apply for one.
Avoid renting: A bridging loan allows you to buy a home quickly and conveniently. You can sell your home while living in your new home.
Repayments:It allows you to pay the loan principal and then the interest afterward with some lenders.
Convenient:You don’t have to wait to sell your current property. You can acquire a bridging loan and pay for your new home. Also, you can pay for the interest and the loan with the sale proceeds.
Loan expenses: A bridging loan consists of two property valuations, two interest rates, and two loan fees. This means you need to plan well to prevent being overwhelmed with these expenses.
Short-sell risk: Remember that homes do not always sell according to the planned or anticipated value. So if you sell it below the anticipated value, you will end up with a larger repayment and interest.
Termination fees: If you switch from a bridging loan to a mortgage before the term of the bridging loan expires, you may incur early repayment or termination charges.
High interest: The longer it takes to sell your property, the higher the interest rate.
Borrowing from licensed money lenders is more straightforward when it comes to applying for a bridging loan. Here are the steps:
Your licensed money lender will require the following documents before approving your bridging loan:
The loan-to-value ratio (LTV) is used by lenders to assess how much they risk with the secured loan.
It represents the portion of the asset’s value that a lender is willing to offer debt financing against.
The LTV is usually expressed as a percentage and typically higher for property or assets deemed more desirable as collateral.
It is possible to use your bridging loan to lower your LTV ratio and make your home loan more affordable, especially when you have a low credit score.
This assures sellers that you have enough cash on hand and that you’re not a high-risk borrower.
As a result, lenders will be more willing to share the risk since you’ll repay the bridging finance. So how can you achieve this?
Consider the following scenario for a private bank loan:
Total net sales proceeds from previous property:$500,000
Non-cash downpayment: $200,000
Maximum loan quantum: $750,000 (75% LTV)
New property cost: $1,000,000
Keep in mind that you’ve not received the $500,000 yet.
However, you’re required to pay the seller for the new home. In this case, you can acquire a bridging loan of $200,000 to take care of the non-cash downpayment.
You can add in the $50,000 of your funds for the cash downpayment, and the bank loan of $750,000 will take care of the rest.
You will still have an extra $300,000 left over after repaying the bridging loan from the proceeds of the sale. Suppose you also wish to put this excess amount toward the new property.
You have two options:
After receiving the sale proceeds, you can repay the bridging loan, which will bridge both a part of the home loan and the downpayment.
Remember, you’ll still have to bear the extra bridging loan interest fees due to the higher quantum.
As mentioned, a bridging loan covers the remaining amount required beyond the LTV.
In Singapore, you can acquire a loan of up to 25% of the buying price of the new property as long as you get enough from your old home’s proceeds.
You can expect approximately 5-6% annually from a bank in terms of interest rates. On the other hand, money lenders provide bridging loans with interest rates of up to 4% monthly.
Yes, you can use your Central Provident Fund (CPF) to pay for your bridging loan. In fact, your CPF can be used to pay for housing, medical expenses and retirement.
So as soon as you’ve completed the sale of the old property and your CPF funds are refunded, you can use it to repay your bridging loan.
However, you’ll be required to service the interest with cash.
You can find two main bridging loan types in the Singapore market. Let’s look at the difference.
Capitalised Interest Bridging Loan
For this, your bank will pay for the full cost of the purchase of the new property.
The mortgage repayments will only start once the old property is sold. This type of bridging loan is ideal if you’re not looking to service two loans simultaneously.
Simultaneous Payment Bridging Loan
This loan type allows borrowers to simultaneously pay off the new home loan and the bridging loan.
Typically, you’ll have a year to finish the sale of the old property and start your loan repayment. This is the more tedious option of the two.
Most money lenders and banks offer you a convenient bridging loan, but you need to be careful not to fall into deep debt.
To prevent this, you need to pay attention to the following:
It Uses Your Property As Collateral
Both banks and money lenders will use your property as collateral for loan repayment. So to avoid losing your precious investment, ensure you can repay the loan on time.
Conduct A Proper Property Valuation
Always make sure you don’t overestimate the value of your home. Doing so can cause severe issues if you miscalculate the value of your property.
Temporary Loan Scheme
The Singapore government provides financial assistance through the Temporary Loan Scheme.
Singaporeans can now purchase a new flat without paying the conventional long-term mortgage, which operates like a typical bridging loan.
To be eligible for the Temporary Loan Scheme, you must:
Both licensed money lenders and banks provide Singaporeans and foreigners with personal loans.
For banks, you can get a loan up to six months of your monthly salary, and sometimes beyond that.
This loan type is handy for unqualified borrowers in solving the role of bridging loans. Besides, the eligibility criteria are similar to bridging loans. You must:
To qualify for a loan from a licensed money lender, you must be a:
Depending on your yearly income, licensed money lenders can usually give you six months of the monthly salary with up to a year to repay everything.
Now that you know what is a bridging loan, you can do your calculations. Only borrow what you can repay.
If you’re unsure which home loan option suits you best, you may need more personalised advice.
Our professional and experienced loan advisors at 1AP Capital are always on standby to help you out. We guarantee only the best experience for you.