How A Bridging Loan Works And How To Apply For One
You may have heard of a bridging loan, but do you know how bridging loan works? Whether you are an experienced property buyer or first-time homeowner, it can be a useful tool.
In this article, we’ll discuss what is a bridging loan in Singapore, the best way to apply for a bridging loan in Singapore, and how bridging loan works here.
What Is A Bridging Loan?
Here are two key points that explain what is a bridging loan.
Bridging loans, or bridge loans, are provided to borrowers on a short-term basis, usually six months. They are commonly used in the property market by borrowers who are in the midst of selling their current home and buying a new one.
How bridging loan works is that homeowners can make use of a bridging loan to “bridge” the required funds to complete the purchase of a new home even while waiting for the sale of their existing home to be finalised.
When To Apply For A Bridging Loan
There are times when getting a bridging loan in Singapore is a good idea.
One is when you encounter any financial situation where you need to get a short-term loan to “bridge the gap” when you need to pay a large downpayment while upgrading to a private property from a HDB flat.
In other words, the best time to borrow is when you want to move into a new home, yet you don’t have the funds to settle the downpayment with because the sale of your old property has yet to be completed.
Note you will need to use your property as collateral if you are dealing with a bank.
Types Of Bridging Loans
There are two types of bridging loans – capitalised interest bridging loans and simultaneous payment bridging loans.
With a capitalised interest bridging loan, your lender finances the total property purchase, and your mortgage repayments begin only when the sale of your old property is finalised.
A simultaneous payment bridging loan, by contrast, involves the repayment of the new property loan, then the bridging loan. You will be given 12 months to complete the sale of your old home before you start to repay the loan.
Factors To Consider Before Applying For A Bridging Loan
When analysing how bridging loan works in Singapore, there are a few important points to think about.
Ask yourself if you can really handle the requirements of a bridging loan in Singapore – a hefty loan from a bank or licensed money lender in Singapore before the actual sale of your first home is a done deal?
Do you have a Plan B if the sale falls through or is delayed? Remember that bridging loans are normally secured with your property.
Higher Interest Rate
The bridging loan interest rate from a bank in Singapore is known to be higher than normal property loan interest rates. Percentages of 5-6% per annum for bridging loans are quite normal.
Short Loan Tenure
While the tenure of the loan will differ depending on the lender, as a short-term loan, the clock is ticking fast on bridging loans. The particularly short tenure of these loans – usually six months – can really increase monthly repayments.
Monthly Repayment Amounts
Since the loan tenure is only six months, your monthly repayment will be higher. Ensure you can fork out this amount every month.
As previously discussed, the bridging loan may be secured with your home. So it’s critically important to be confident that you can deal with the repayment commitments every month for both the loan and mortgage.
You should not take more money for this loan than what is required. You are advised to keep a bridging loan to a maximum of 25% of the price of your new property.
How A Bridging Loan Can Lower Your LTV Ratio
When you have a good understanding of how bridging loan works, it can become a useful tool to potentially lower your loan-to-value (LTV) ratio if you choose.
While the bridging loan amount should be kept as low as possible in the majority of circumstances, it is constructive to examine how a bridging loan can be used to lower your LTV ratio.
This can be done by increasing the amount of a bridging loan. This reduces your loan amount and consequently, lowers your LTV ratio.
So why is it good to have a lower LTV ratio?
This is because if you have a higher LTV ratio, you need to borrow more. To a lender, this increases your risk of default.
When you receive the money from the sale of your old home, you may then pay back the bridging loan, which has now paid for the downpayment and a percentage of the amount of the home loan.
You should carefully calculate the increased cost of the bridging loan interest rate against the advantages of a lower LTV ratio.
Where To Apply For A Bridging Loan
Banks and licensed money lenders offer bridging loans. Before you apply, make sure you understand how bridging loan works in the Singapore market.
Ensure you fit the eligibility criteria for the bridging loan, and prepare the documents that you will need.
To meet eligibility requirements to receive a bridging loan in Singapore, you need to have your finances in good order, which means having a good credit score. This is normal and in line with the requirements of other types of loans in Singapore.
To apply for a bridging loan in Singapore, you can be a Singapore citizen, a permanent resident, or a foreigner – however, you must have commenced the sale of your property.
To begin the application process, provide your Option to Purchase (OTP) document. Your OTP document will prove you have the exclusive right to purchase the property.
You also have to show your outstanding loan statements and CPF statements to the lender.
Fees And Charges
Different lenders will have different charges and rates. Late payment fees of 3-5% can be expected, depending on the lender.
Banks have been known to give a grace period of 15 days, but don’t take this as a given. To avoid damage to your credit rating, you must keep a close eye on your monthly repayments and pay on time.
Decide If You Need A Bridging Loan
For a property novice, bridging loans can be difficult to understand. They seem to offer the prospect of the convenience of facilitating a property purchase while still awaiting the cash from a property sale.
While they can be a good stop-gap measure, they also contain an element of risk due to their high interest rate and the fact that it involves the pledging of your property.
It’s critical to understand, or discuss with someone who understands, how bridging loan works in Singapore. So if you are still confused, speak to a financial expert.
But if you are ready to apply for a loan, consider Horison Credit, a reputable licensed money lender in Singapore.