Are you looking for the perfect loan to bridge a financial gap?
Bridging loans in Singapore are becoming increasingly popular with both business owners and individuals seeking short-term finance for urgent needs.
But before you decide on taking out this type of loan, it’s important to understand the details.
In this blog post, we’ll be discussing bridging loan meaning, how much is a bridging loan, and what factors determine the total amount of a bridging loan, along with the application procedure and factors to consider.
What Is A Bridging Loan?
A bridging loan in Singapore is a type of short-term loan designed to provide quick access to funds for urgent situations, especially the buying and selling of property.
Here’s a simple example of this scenario.
Let’s say you were selling your current flat or home and buying a new one. In a financially ideal condition, you would sell your current home and buy a new one with the sale proceeds right away.
But it hardly ever happens this way. In most cases, you would first buy a place to move into and then sell your old home.
So how do you manage to pay the downpayment for the new home?
That is where a bridging loan comes into the picture.
A bridging loan is designed to provide a short-term solution for urgent financial needs. As such, it can help you bridge the funding gap between selling the old property and purchasing the new one.
It is crucial to note that a bridging loan is short-lived and usually has a tenure of six months. Plus, the bridging loan interest rate (5-6%) is slightly higher than traditional loans.
Still, it provides a quick and convenient way to access funds when you need them the most.
But what types of bridging loans are there in Singapore? And how much is a bridging loan?
Capitalised Interest Bridging Loan Vs Simultaneous Repayment Bridging Loan
There are two types of bridging loans.
Capitalised Bridging Loan
This loan covers the whole amount of the new home you plan to buy. Plus, in this case, you don’t need to start bridging loan repayments until your old property has been sold.
This gives you a bit more breathing space as you don’t have to cover two loans (mortgage + bridging) at once.
Simultaneous Repayment Bridging Loan
This loan works differently. You have to start repaying your loan as soon as you have withdrawn it. This puts you in a stressful situation as you have to take care of two loans simultaneously.
However, these two loans only exist in theory. In practice, all bridging loans in Singapore have to be repaid within six months as per government laws.
The only choice that you get is whether you want to borrow just the downpayment or a part of the home loan as well.
So how much can you borrow? Let’s see.
How Much Is A Bridging Loan?
In common practice, the maximum amount you can borrow with a Singapore bridging loan is variable. Why?
Because the value of the property you want to buy will determine the amount of your loan. Since people are looking for an amount to pay off the downpayment, most bridging loans will lend you 20% of your new property’s value.
However, 20% of the property value isn’t a fixed amount. The bridging loan amount can vary depending on the financial institution lending you the loan and the profitability of your housing deal.
For instance, if you wanted to sell your current home for $1.5 million and buy a smaller one for $1 million, you’d only need 20% for the downpayment, which is $200,000.
However, the numbers clearly show that you will be left with around $488,000 after selling your old house and paying off the bridging loan.
In such cases, money lenders might agree to loan out more than 20% of the property’s value. But you will need to submit documented proof for the following:
- Your old property’s sale proceeds exceed the value of your new property.
- You’re employed or earn a steady income.
- You have a good credit score.
How To Apply For A Bridging Loan
There are two ways you can get a bridging loan in Singapore:
- Get a bridging loan from the bank
- Or get financing from a money lender
Here is a short summary of how you can get both.
Almost all Singapore banks follow the same application process and have similar requirements.
- Register yourself with the bank of your choice.
- Get complete information about bridging loan applications.
- Log on to the online portal and fill up the form.
- Upload the required documents and submit your application.
- Wait for the bank’s response, get approval, and receive your loan amount.
- Singaporeans and permanent residents (PRs) above 21 years of age
- You are currently selling a property
- Have proof of sellable property ownership
- You have a good credit score
- Option to Purchase (OTP) document
- Latest CPF withdrawal statement
- Latest bank loan statements
Banks usually have rigorous assessment procedures and take longer to approve bridging loans.
Licensed Money Lenders
Legal money lenders, on the other hand, tend to have simpler and faster procedures.
- Call or email a licensed money lender.
- Fill up its form online or give your answers via a phone call.
- Submit the required documents.
- Wait for their confirmation call or email and receive the loan amount in your account.
It’s pretty simple – you don’t have to pass a lengthy and complicated application process.
- At least 18 years of age
- Valid citizenship or PR status
- Earn $1,500 per month ($2,000 if you’re a foreigner)
- Must have the OTP from the seller of the property
- NRIC (for identity proof)
- Salary slips and employment letter as proof of income and employment
- Property documents as proof of residence
- Singpass to access to HDB, CPF, and IRAS websites
- Copy of the OTP
So that tells you what is a bridging loan, how much is a bridging loan, and how you can apply for one at banks and licensed money lenders.
But learning the bridging loan meaning is not enough; there are a few things to consider before getting a bridging loan.
What To Know Before Getting A Bridging Loan In Singapore
Consider the following before you apply for a bridging loan:
1. Total Loan Amount
So how much is a bridging loan, really? As mentioned earlier, the total bridging loan amount is usually 20% of the property you intend to buy and is meant for the downpayment.
Make sure you have enough funds of your own to cover the purchase and pay back the bridging loan with interest.
2. Interest Rate
Bridging loan interest rates are quite high compared to personal loans or other housing loans. Most lenders charge an interest of 5-6% of the loan amount per annum.
Bridging loans in Singapore are short-lived and have a repayment period of six months.
You have to ensure that your first property is sold and you get the sale proceeds within the six-month period, or you might have to bear financial and legal consequences.
4. Total Cost Incurred
Although the total major cost of a bridging loan includes the bridging loan interest rate and the loan amount itself, you have to be mindful of other associated costs.
You have to pay the following to a bank when you get a bridging loan:
- Loan installments (with interest)
- Administrative/processing fee
- Late fees (3-5%) or penalties (possible)
The processing fees and penalties vary from one bank to another. However, money lenders tend to have slightly lenient terms and more budget-friendly costs. They usually have:
- No upfront fees
- An interest rate of up to 4% per month
- A maximum of 10% processing fee
- $60 for each late repayment
These are some things you need to consider before applying for a bridging loan to finance your new property purchase. You should also analyse your financial capacity and see if a loan would suit your needs or not.
Now that you thoroughly understand what is a bridging loan, let’s see how you can use it to lower your LTV ratio.
How To Use Bridging Loan To Lower Your LTV Ratio
The loan-to-value (LTV) ratio is critical for lenders because it reflects your capacity to pay back a loan. In fact, in most cases, your LTV ratio determines the approval or rejection of your loan application.
An LTV of 75-80% is the ideal LTV ratio for most banks, and they might even go up to 85%. However, things can be difficult if your LTV ratio is still higher. Why?
A higher LTV ratio means you have lower financial reserves, and lenders will have to loan out a larger amount. This puts lenders at risk, and therefore, they may be reluctant to approve your loan application.
But that doesn’t mean you can’t access funds to get your desired property. A bridging loan can help you lower your LTV ratio.
- Increase the downpayment amount
- Get a cheaper home or property
- Or get a home equity loan
These measures can significantly bring down your LTV ratio and improve your chances of getting a loan.
But what if your LTV ratio is close to 90%? There’s still a way out.
Consult A Licensed Money Lender
If your LTV ratio is around 90%, banks would be hesitant to approve your loan application.
However, now that you know how much is a bridging loan, you can still get a bridging loan for HDB from licensed money lenders.
This is because they usually have more lenient loan policies than banks. But you still need to have an acceptable credit score and a steady source of income.
So if you’re looking to finance your HDB purchase with a bridging loan, be sure to consider the above-discussed points before making any decision.
Not sure if a bridging loan is right for you? Loan advisors at Credit 21 will be able to guide you in the right direction.