What Is A Bridging Loan And Should You Apply For It?
Bridging loans can serve many purposes. But what is bridging loan?
In Singapore, bridging loans are commonly used to bridge the gap between buying a new property and selling off an old one. It is a means of getting funds while waiting for the sale proceeds of an old property to come in.
If you’re considering applying for a bridging loan, here are some things you should know about how these loans work and how much money you can borrow apart from knowing what is bridging loan.
What Is Bridging Loan?
It is a short-term loan that can help you cover a gap in financing when you’re in between properties.
A bridging loan is suitable if you need funds to buy a property before selling your existing one.
It has a short loan tenure of about six months. However, it has a relatively high interest rate compared to other types of loans in Singapore.
Banks charge about 5-6% per annum. The licensed money lenders that do offer bridging loans can charge an interest rate of up to 4% per month.
Types Of Bridging Loans
In Singapore, there are two types of bridging loans – the capitalised interest bridging loan and the simultaneous payment bridging loan. Both work quite differently from the other.
Simultaneous Payment Bridging Loan
This type of bridging loan allows you to pay off both the new mortgage and the bridging loan simultaneously, which can be stressful. You will have a year to sell your previous home and begin loan repayment.
Capitalised Interest Bridging Loan
This bridging loan will cover the entire purchase price of your new home. Your mortgage payments don’t start until you have sold your current home. This is a good option if you do not wish to service two separate loans simultaneously.
But as you must repay bridging loans within six months, the differences between the two categories are not that important.
The main thing to decide is if you want to borrow only enough to cover the downpayment or up to 25%, plus a portion of the mortgage.
Note that these two types of bridging loans are only available from banks, not licensed money lenders.
If you wish to borrow from a licensed money lender, you must repay the loan within one month or by the completion date of your property. Depending on your income, you can borrow up to six times of your yearly income.
What To Consider Before Applying For A Bridging Loan
So now you know what is bridging loan – a short-term loan that bridges the financing gap between selling your property and buying another.
Bridging loans are secured by property, which means that if you can’t pay back the loan, the lender can repossess your home or other assets.
They are usually repaid within six months, and the interest rate is by no means low. Hence, a bridging loan involves a certain amount of risk.
Here’s what you need to ask yourself when deciding if you should get a bridging loan:
- How much can I borrow? It depends on the lender’s policies and how much money you really need. Bridging loans are most commonly used for the downpayment of a new property. In other words, you only need to borrow 20% of the property value. Do not borrow more than what you need.
- Can you sell your old home within six months? Bridging loans are short-term loans, so you’ll need to be able to repay the loan within six months. This means you need to conclude the sale of your old property within the six-month period in order to have the funds to pay back the bridging loan.
- Do you have a backup plan if the sale falls through? Can your lender wait longer than six months? Will your sales proceeds be enough to cover the bridging loan amount? Ask yourself these questions and ensure you have savings on hand if your property is sold for an amount that is less than what you expected.
- What is the total cost of a bridging loan? Think beyond the bridging loan principal and interest amount. Factor in related costs such as interest repayments, the administrative or processing fee, and late fees or penalties. These fees vary from bank to bank.
If you borrow from a licensed money lender, there won’t be any upfront payments – the processing fee will not be more than 10% of your loan amount. A $60 fee for each late repayment and a late interest rate of no more than 4% per month will apply.
How To Use Bridging Loan To Lower Your LTV Ratio
The lower your loan-to-value (LTV) ratio, or percentage of the property value, the better it is for lenders.
They use this parameter to decide whether a loan should be approved and, if so, on what terms.
A higher LTV ratio puts lenders at high risk. Loaning you a higher amount means the lender has to take on higher risks. What if you default on the loan?
So it’s far better to have a low LTV ratio. This reduces the risks for a lender and increases the chances of your application getting approved.
If your LTV ratio is too high, there are a few things you can do to lower it:
- Make a bigger downpayment
- Choose a less expensive property
- Get a home equity loan
Now, let’s see what options you have if things go south and you’re unable to repay the bridging loan.
Can You Use CPF To Cover Bridging Loans?
Let’s say you took a bridging loan from a bank or money lender for the downpayment, but the sale of your old property fell through and you’re now stuck with the loan.
How are you going to repay it?
The good news is that you can use your CPF savings and refund them once you have sold your property. But you will have to pay an interest amount to your CPF in cash.
So if you have enough CPF savings and can pay the interest amount on top of it, you can surely use your CPF to pay for your bridging loan.
How To Apply For A Bridging Loan
If you’re looking for a bridging loan in Singapore, it’s essential to know the type of application process you should expect.
To apply for a bridging loan, you will need to provide the following information:
How much money you need: This may include funds for legal fees and stamp duty if applicable.
Your employment history: Lenders want to ensure that you can afford to repay the loan in full at the end of its term.
Proof of your monthly income: Lenders want proof that they won’t lose their capital if you default on payments.
There are two types of lenders to choose from:
All banks in Singapore usually have the same application process and requirements. Here’s what you’ll need to do:
- Talk to the bank’s representative about a bridging loan application.
- Visit the bank’s online bridging loan portal.
- Submit the required documents with your completed application.
However, what might seem like a straightforward process on paper is actually a complex one with strict requirements.
Banks require an excellent credit score and a few additional documents, making the process a little more complicated.
This is where licensed money lenders may prove to be a better option.
Licensed Money Lenders
Applying for a bridging loan from a licensed money lender is much simpler, especially if you’re already a customer.
Here’s what you need to do:
- Call or email your licensed money lender.
- Fill up the application online.
- Submit the required documents listed on its website or after a call.
- Wait for the confirmation call or email and receive the loan amount at the money lender’s office.
For money lenders, you must:
- Be at least 18 years of age (banks need you to be 21 at least)
- Have valid citizenship or PR status
- Earn at least $1,500 per month ($2,000 if you’re a foreigner)
- Have the Option to Purchase (OTP) from the seller of the property
Legal money lenders will ask you for your:
- NRIC (for identity proof)
- Payslips and employment letter
- Property documents as proof of residence
- Singpass to access CPF, IRAS, and HDB websites
- Copy of the OTP
Alternatives To Bridging Loans
If you’re not able to get a bridging loan or don’t want to take one, there are a few other options you can consider:
You can apply for a personal loan to finance your new property purchase.
Licensed money lenders and banks usually offer personal loans at a lower interest rate than bridging loans. Plus, the amounts can sometimes be enough to cover the downpayment.
For example, if you earn at least $20,000 per year, you’re eligible to get a personal loan totalling six times your monthly salary from a licensed money lender.
Temporary Loan Scheme
If you wish to use your existing flat’s sale proceeds to purchase your new flat without taking a home loan, the Singapore government’s Temporary Loan Scheme (TLS) is an option.
The concept is similar to a bridging loan, but the conditions differ. You must have:
- Applied to sell your first flat
- Booked a flat with ready-for-collection keys
- Enough CPF and sale proceeds to repay the TLS
- Already redeemed your housing loan for the existing flat
Lastly, you can take a home loan to finance your new property purchase. Most home loans have lower interest rates than bridging loans.
The loan will be disbursed after you’ve made the downpayment. Remember your home will be treated as collateral. A stable monthly income and a good credit score are important.
Choose The Right Lender For Your Bridging Loan
So now you know what is bridging loan. The main benefit is that bridging loans can help you buy a home while your existing home is still being sold.
In Singapore, bridging loans are used by investors who want to buy and sell properties at the same time.
Bridging loans can also be used for other purposes, such as paying off an outstanding loan when you move house, renovations, or repairs before moving into a new home.
Contact Horison Credit for more guidance on bridging loans.
We are a reliable licensed money lender in Singapore that offers affordable interest rates and no hidden fees.