Have you ever wondered what is a bridging loan?

Simply put, a bridging loan is a common form of finance for homeowners in Singapore.

Bridging loans can help you pay for your new home and other expenses while you’re building up equity in your property, making them an attractive option for first-time buyers.

However, there are some things that you should know before applying for a bridging loan so that you don’t end up paying too much money or get stuck with a bad loan deal.

If you’re still wondering what is bridging loan, here’s a basic guide on bridging loans in Singapore.

What Is A Bridging Loan?

A bridging loan is a short-term loan used to cover the financing gap between selling your old home and purchasing your new property.

Bridging loans are used to cover all types of properties, including Housing and Development Board (HDB) properties.

A bridging loan offers an excellent solution when you want cash to make a downpayment for a new property or secure HDB financing for a home in the shortest time possible.

Like other loans, bridging loans are repaid over time – usually in six months with monthly repayments.

How To Apply For A Bridging Loan in Singapore

Now that you know what is a bridging loan, you can apply for a bridging loan in Singapore via a bank or licensed money lender.

Banks

For banks, you will need to follow the following procedure:

Register for a bank account.
Contact a representative to apply for a bridging loan.
Access the online bridging loan services provided by the bank.
Submit all eligibility documentation and supporting documents.
Submit them using the designated submission channel set up by your bank.

To be eligible for a bridging loan, you must:

Be a Singaporean or permanent resident above 21 years of age
Have a high credit rating
Possess ownership documentation for marketable property

You need the following documents:

Option to Purchase (OTP) documentation
CPF withdrawal statements
Latest bank loan statements

You can also bring along other relevant documents such as proof of employment or salary slips when applying for an extension of time on your current loan.

Once you have submitted all the required paperwork, your loan application will be processed and evaluated before approval, typically within 24 hours.

Money Lenders

The application and approval process for an HDB bridging loan is more straightforward for money lenders. You simply need to:

Call your money lender or visit its website.
Fill out the application form or answer the questions.
Submit the required documents and your proof of eligibility to the website.

To be eligible, you must:

Be a Singaporean or permanent resident who is at least 18 years old
Have a monthly income of $1,500 for Singaporeans and $2,000 for foreigners
Have activated the OTP

Here are the documents you’ll need:

Proof of employment and income
Proof of residency
Copy of the OTP
Copies of your NRIC
Singpass to access the websites of IRAS, the CPF, and the HDB

Once you’re through with the application, the evaluation process will be done in a few minutes, and you will receive a call or email confirming your approval for the loan.

How To Use The Bridging Loan To Lower Your LTV Ratio

If a home loan, personal loan or credit card debt are preventing you from buying another property in Singapore, then applying for a bridging loan may be the solution.

The key benefit of a bridging loan is that no more money will be taken out of your pocket.

Instead, monthly repayments on top of your sources of income and other mortgage routes will be used to gradually pay off the amount borrowed – plus the bridging loan interest rate.

If your credit score is less than ideal, you can utilise a bridging loan to lower your LTV ratio. You would need to borrow less, which makes your housing loan much more affordable.

In this way, you won’t need to pay off all of your other obligations before relocating – just this one.

This assures potential buyers that you have a sizeable amount of cash on hand.

It also demonstrates your low risk as a borrower and convinces your lender that you will repay your bridging loan.

How Much Can You Borrow With A Bridging Loan?

The amount you can borrow when applying for a bridging loan will depend on your income and the loan-to-value (LTV) ratio.

The LTV is the amount of your bridging loan divided by the property’s value.

The higher this number, the less money you can borrow.

Here’s an example: If you have a 100% mortgage on your house and want to buy something else with cash (maybe another property), applying for a 75% Loan Against Property (LAP) would make sense.

This means that instead of simply having 75% equity in your home when you purchase anything new, we are now talking about buying something worth around 125% more than what was initially due.

As a result, our total investment is now 125 – 75 = 60%.

With an LTV value of 60%, you can borrow up to 60% of the property’s purchase price. Banks usually prefer an LTV of 80% and below.

Although the exact loan amount varies depending on the circumstances, banks are often ready to cover a sizeable portion of the value of the sellable property.

Most applicants acquire personal loans that are six times their monthly salaries.

At the same time, some only receive sufficient funds to cover the downpayment criteria set by the property seller.

With a licensed money lender in Singapore, you are eligible for HDB financing of up to six times your monthly wages.

Can You Use CPF To Cover Bridging Loan?

You can pay for your bridging loan with your Central Provident Fund (CPF) funds, and then you can get your money back once you sell your home.

But you will have to pay an interest amount to the fund in cash.

What To Know About A Bridging Loan

As previously mentioned, money lenders and bank loans for HDB are offered in amounts equal to your pay for six months.

If you are not careful, it is easy for you to fall into debt traps. This is why it’s beneficial to take into account the following factors before borrowing:

Overall Costs

There are a lot more costs associated with a bridging loan. The total cost is inclusive of:

Processing fees
Closing administrative costs
Total interest paid back by the loan’s conclusion
Additional diligence

For a Singapore bridging loan, licensed money lenders impose the following fees:

Processing fees that are not more than 10% of the loan’s total amount
Maximum of $60 for each month payment is late

Loan Amount

The earnings from the sale of your previous home are used to pay for the downpayment and 25% of the cost of buying your new home.

A bridging loan provides access to these funds that you would not otherwise have for the downpayment. However, these loans do not pay down the whole mortgage balance.

Monthly Payments

Bridging loans only cover a proportion of the purchase price for the property.

It is advisable to set some funds aside for your personal expenses and cater for any property-related costs.

Interest Rate

Even though they are short-term loans (six months), the bridging loan interest rate of 5-6% per year is high, to say the least.

On the other hand, home loans carry an annual interest rate of 2.15%.

It is reasonable to say that bridging loans are more suited for long-term than short-term borrowing.

Loan Tenure

Though a Singapore bridging loan is short-term, it can be problematic because of its high interest rates.

Even though some lenders provide a loan tenure of one month or up until the property’s sale date, there is no assurance that this will hold for all lenders.

Therefore, borrowing money you can pay back within the specified time frame is advisable.

Alternatives To A Bridging Loan

Suppose you apply for a bridging loan and the application is not approved. You have these two alternatives:

Personal Loan

A personal loan is a type of unsecured loan that is given without the need for collateral.

Some banks in Singapore provide personal loans that are greater than six times your monthly wage.

To apply for a bank loan for HDB, you have to:

Be a Singaporean permanent resident above 21 years of age
Have a high credit rating

Possess ownership documentation for marketable property

With legal money lenders in Singapore, you must:

Be a Singaporean permanent resident of 18 years and above
Have a monthly income of $1,500 for Singaporeans and $2,000 for foreigners

You can typically get six months of your monthly wage from licensed lenders, with up to a 12-month repayment period as long as you earn at least $20,000 yearly.

Temporary Loan Scheme

The Singapore government provides a range of financial assistance programmes, including temporary loan schemes.

With such schemes, you can acquire a new flat without paying the long-term mortgage loan as a Singaporean or permanent resident.

These schemes function somewhat similarly to standard bridging loans.

To qualify for temporary loan schemes, you must:

Reserve a new apartment or property with pick-up-ready keys
Be prepared to sell your current apartment
Obtain a house loan from a financial institution by applying for one
Have adequate CPF funds to cover your short-term borrowing

If you are turned down for a bridging loan, these loans are a great backup plan.

A Bridging Loan Can Be a Viable Solution

A bridging loan in Singapore can be used as a solution for buying your new home.

The process is simple, and you don’t need to worry about the loans being approved or denied by lenders.

You can always opt for personal loans or government temporary loan schemes if the loan is denied.

If you are unsure if this type of loan is right for your needs, then it’s best to contact an expert from Credit 21 who will be able to guide you through the process step by step.

What Is A Bridging Loan And Should You Apply For It?