A bridging loan in Singapore can be a useful financial tool for many. It allows you to bridge a gap in financing, such as when you need cash quickly to purchase a new property before selling an existing one.
This kind of loan is especially helpful if the lead time between closing on your current home and completing the purchase of your new home is too short for traditional financing methods.
Bridging loans can provide quick access to needed funds without having to wait until other sources of income are available.
With their flexibility and fast approval process, a bridging loan in Singapore is an ideal solution for those who need access to funds quickly and securely.
Find out how bridging loan works and how to apply for one in this article.
What Is A Bridging Loan?
As mentioned, a bridging loan is a short-term loan taken to bridge the financing gap between the time you have to pay the downpayment for your new property and when you get paid for your old property.
To stake a claim on your new home, you need to pay the downpayment for the new property. But you may not have cash, and the proceeds from selling your old home have not come through.
In such instances, you will need to take a bridging loan to make the downpayment. Fortunately, various lenders offer these loans.
Unfortunately, while bridging loans have quick approval rates, they also have higher interest rates and shorter tenures.
You’ll need to settle the loan within six months after taking it and pay 5-6% interest annually. However, the bridging loan interest rate may vary depending on the lender you choose.
Also, it is worth noting that you’re limited to about 20-25% of the property value. However, some lenders may scrap this rule and approve higher loan amounts as long as the sale proceeds of your old home are able to cover it.
Moreover, you can use the bridging loan to lower your loan-to-value (LTV) ratio. But how? Let’s find out below in order to understand how bridging loan works.
How A Bridging Loan Can Lower Your LTV Ratio
Let’s assume you’re in the scenario below:
- Value of your new property: $1 million
- Maximum loan quantum: $750,000 (75% LTV ratio)
- Downpayment: $200,000
- Sales proceeds from your old property: $500,000
Let’s say you are selling your old property, whose approved sale proceeds are $500,000, but you haven’t yet received the amount. However, you need to make the $200,000 downpayment for the new property soon.
If you take a bridging loan worth $200,000 for the downpayment and another $750,000 loan from the bank, you’ll be left with $50,000 to settle in cash, which you can pay from your savings. After repaying your bridging loan, you’ll be left with $300,000.
But you may want to put all the proceeds from selling your old home into your new property. If this is the case, you have two alternatives.
The first option is to pay $300,000 as a lump sum payment of the $750,000 loan after the expiry of the prepayment penalty period.
The second alternative is to increase the bridging loan quantum from the initial $200,000 to $500,000. Given that you already have $50,000 from your funds, you’ll only need a $450,000 loan from the bank or a money lender. This new loan will significantly lower your LTV ratio from 75% to 45%.
In the second option, the sale proceeds of your old property will be used to settle the bridging loan, which bridged the downpayment and a portion of your home loan. However, it is worth noting that you’ll incur higher interest because of the higher loan quantum.
You can decide if you want the bridging loan to cover only the downpayment or a part of the home loan as well.
Types Of Bridging Loans
There are two types of bridging loans in Singapore.
Capitalised Interest Bridging Loan
In this arrangement, the bank will cover the entire cost of buying your new home as collateral for this bridge loan.
Mortgage payments won’t begin until your old home has been sold. This means you won’t need to service two loans at the same time.
Simultaneous Payment Bridging Loan
With this type of bridging loan, you have to pay off your new home’s bridging loan and mortgage concurrently.
You have a year to finalise selling your previous residence and begin repaying your loan. This is the more stressful option of the two.
When To Apply For A Bridging Loan
In general, a bridging loan in Singapore takes significantly less time than other types of loans. The application process is relatively straightforward and can usually be completed within one or two days.
Some apply for a bridging loan in Singapore when upgrading from a HDB flat to a private property that requires a large downpayment.
As mentioned, the bridging loan can cover the downpayment alone or a percentage of the home loan as well. However, it doesn’t mean you can’t take a bridging loan when buying a HDB flat.
Factors To Consider Before Applying For A Bridging Loan
So now you know how bridging loan works. You can benefit from competitive interest rates and repayment terms that are tailored to your needs and budget.
With the minimal paperwork required, it’s possible to avoid complex administrative processes while getting the money you need fast.
But before you apply for a bridging loan, it is crucial to consider the following factors.
Reason For Taking A Bridging Loan
A bridging loan is mainly used to cover the downpayment of your new property. However, it isn’t as simple as it seems.
Depending on your situation, there are instances when taking a bridging loan to make downpayment is a good idea, while at times, it may be a bad idea.
Consider these scenarios:
- Take a bridging loan if you sold your old property through an en bloc sale. These sales are lucrative, meaning you’ll have enough funds to repay the bridging loan’s high interest.
- Do not take a bridging loan if you are selling a newly renovated property. In this case, a renovation loan may be more viable than a bridging loan.
- Take a bridging loan when upgrading your property. Moving from a low-cost, basic home into a new upgraded one needs stable funding, which you can get by taking a bridging loan.
Cash On Hand
Of course, some take bridging loans because they don’t have enough cash. However, some may have some savings available but yet still opt for a bridging loan. You should only consider this option if you wish to preserve your money for emergencies or other uses.
However, if you have available funds in your CPF Ordinary Account (OA), you should use the money to cover the downpayment rather than take a bridging loan. This is because the interest rate for your CPF is lower than that of a bridging loan.
Total Costs Incurred
One point worth remembering is that bridging loans have higher interest rates. You are likely to incur 5-6% interest per annum on your bridging loan.
Fortunately, bridging loans have a relatively short tenure. Considering the six-month maximum repayment period, you’ll spend less on interest overall even if the interest rate is higher.
Therefore, you should determine how much you’ll incur in costs before taking the bridging loan. The total cost entails the gross interest and other miscellaneous fees.
What Are Your Alternatives If You Fail To Sell Your Old Property?
Unfortunately, as life is often unexpected, the sale of your old property may not go through as planned. That’s why it is good to be prepared before committing to a bridging loan.
The exit clause you have with your lender should offer a way out in situations. For instance, if the sale of the old property doesn’t materialise or takes far longer than planned, check on the penalties you may incur.
These terms vary depending on the lender. It is therefore wise to consider the terms involved before considering a bridging loan.
How To Apply For A Bridging Loan
Applying for a bridging loan usually involves four steps, as shown below.
The initial step involves the lender assessing your creditworthiness. You may need to present your proof of identity, address, and bank statements for the last three months.
Valuation Of The Property
Your lender may recommend a professional valuation for your property to determine its value. Besides, it may need to know your property portfolio to determine the extent of your knowledge in this area. The documents you’ll need to present here vary depending on the lender.
Determining The Loan Purpose
The lender may require you to explain why you’re taking the loan. The documents it will need from you vary depending on the purpose of the loan.
For instance, a bridging loan taken for a property purchased through an auction requires different documents from a loan taken to upgrade a property.
Evaluation Of The Exit Strategy
This refers to the plan you have regarding how you’ll repay your bridging loan. Lenders will need to know the repayment plan you have before they can approve your loan application.
Some exit strategies you can opt for include:
- Paying using the sale proceeds of your old property
- Paying from the sale of your newly refurbished property
- Paying by remortgaging your property
Lenders That Offer Bridging Loans
In Singapore, several lenders and banks offer bridging loans, such as:
- Licensed money lenders: Several money lenders in Singapore offer bridging loans or personal loans for property-related needs. At Credit 21, you can enjoy competitive interest rates, flexible payment plans, and less stringent eligibility criteria.
- DBS Bank: This bank offers bridging loans for the purchase of all property types. Its bridging loans have a maximum tenure of six months and charge prime rate interest.
- Standard Chartered Bank: This bank offers bridging loans for the purchase of HDB flats. Its bridging loans have a maximum tenure of six months.
- United Overseas Bank: UOB offers loans for the purchase of HDB flats. Its maximum loan tenure is six months, and they charge a 4-5% interest rate, depending on your LTV.
Bridging loans are available to Singaporeans, permanent residents, and foreigners. However, you must satisfy the following criteria to qualify for this loan.
To qualify for a bridging loan, you must provide your proof of identity, address, and latest bank statements.
You’re more likely to get a bridging loan if your finances are stable. Lenders usually assess your income and credit score to determine if you are eligible for a loan.
Your credit score speaks volumes about your financial situation. Therefore, lenders tend to evaluate your credit score before approving your bridging loan. The higher the credit score, the higher your chances of securing a bridging loan.
Business And Property Assets
Your chances of getting a bridging loan will be higher if you have more considerable equity in the property you’re selling.
Also, you are likely to secure the loan if you have a good property portfolio. If your loan is solely for commercial purposes, your eligibility for the loan will depend on the business plan you draw up.
The lender may request the following documents when applying for a bridging loan:
- Option to Purchase (OTP) document
- Your CPF withdrawal statements
- Outstanding bank loan statements
Fees And Charges
Bridging loans attract the following charges:
- Interest: The interest rates vary from 5-6% per annum, depending on the lender.
- Late payment fee: Varies from 3-5%, depending on the financial institution. However, banks offer a 15-day grace period for the repayment of the loan before entering a late repayment zone. Note that even if a bank has a grace period, late payments can significantly lower your credit score.
Be Clear About How Bridging Loan Works
Overall, a bridging loan in Singapore can provide you with the ability to bridge financial gaps without having to wait for more traditional financing methods.
With quick approval, flexible repayment terms, and minimal paperwork, it’s easy to see why a bridging loan in Singapore can be the perfect solution for those who need access to funds quickly for a new property.
Credit 21 is a reliable licensed money lender that offers competitive rates in Singapore. Our eligibility criteria are customer-friendly, and loan approval and disbursements are instant.