If you’re like the majority of Singaporeans, you probably live in a HDB flat. But eventually, you may decide to sell off your home and upgrade.
But even while waiting for the sale to be completed, you may not have enough to buy another property immediately since the process takes time.
The wait can be distressing, especially if you need the sale proceeds for your new property. If you are considering selling your old property and upgrading to the new one, you may be thinking about applying for a bridging loan in Singapore.
The first thing to do is to do your research. You need to understand what a bridging loan is and how bridging loan works. This article discusses bridging loans in detail and how to go about applying for one.
A bridging loan or bridge loan is a short-term secured loan that is used when you are waiting for your current home to be sold but need funds to purchase a new one.
As its name suggests, it helps bridge the gap between the time required to make a downpayment for a new property and when you receive sales proceeds from your old home.
You can use a bridging loan to purchase a property from an auction, or make a deposit on a property. Generally, a bridging loan can be used for anything you want in a property purchase if you have collateral to pledge.
When you obtain a bridging loan, your money lender will take over the mortgage of your existing property and finance the new property. That is how bridging loan works.
The minimum repayments of your bridging loan will depend on the interest. Usually, they will capitalise on your interest until you sell your current home.
Once you sell your existing home, the net proceeds you obtain will reduce the borrowed amount. You will then continue to pay the remaining amount as a standard mortgage.
Compared to regular home loans, bridging loans are expensive because of their higher interest rates, which range from 5-6% per annum for banks. But depending on the lender, you can opt to pay off the interest first.
Then you can settle the bridging loan amount once you receive the sales proceeds from your former home.
Licensed money lenders are only permitted to charge a maximum interest rate of 4% per month. This rule applies regardless of your income or whether you are taking a secured or unsecured loan.
The loan amount you are allowed to borrow to purchase your new property is called the loan-to-value (LTV) ratio.
Bridging loans can help in reducing this ratio when your credit score is poor. A lower LTV ratio assures the lender of your ability to repay your debt.
You may be asking, why should you lower your LTV ratio? It’s because if you have a higher LTV ratio, you risk defaulting as you need to borrow more.
A bridging loan becomes important here by giving you the money you need to make a downpayment on your new property. This reduces your loan amount, and consequently, your LTV ratio is lowered.
Here’s an example:
Let’s say your new property costs $700,000 with 75% LTV to be settled by the loan. The sale proceeds from your former home are expected to yield $500,000.
You can decide to get a bridge loan of $200,000 as the non-cash payment and bring the remaining amount from other sources to top up the downpayment.
Here are a few scenarios when a bridging loan may come in handy.
When selling property as part of a collective sale: If you are a homeowner and your home was sold as an en bloc sale, you should quickly get a new property. Bridging loans will offer the financing help you need. You don’t have to wait for several months for property prices to hike.
When you need to upgrade: This is one of the main reasons for applying for a bridging loan. For example, you may need to sell your old HDB property to buy a private home.
When selling and renovating your old home: To sell your old property, you need to make improvements to attract clients. But renovations may exhaust your cash reserves. In such situations, a bridging loan is very useful.
Before applying for a bridging loan, you must take note of the following factors:
Money lenders will require other items of value from those who need a home loan. Also, note that a bridging loan’s value depends on the value of your sellable property.
It would help if you took note that the loan principal that takes only 25% of your property price. As such, it can only be used for the downpayment and the quarter of the property price.
Don’t expect it to pay for your whole home loan. And since you may be allowed to borrow a higher amount, it doesn’t mean you should – only borrow what you need.
Bridging loans are short-term financial aids that come with high interest rates. You may be required to pay between 5-6% per annum. Licensed money lenders have an interest rate capped at 4% per month.
A bridging loan allows you to settle your debts every month by helping you foot the downpayment of your desired property.
So before taking the loan, consider if you have enough savings in case your monthly salary fails to pay for the monthly repayments. Also, check if you can afford the monthly repayments. You should know high interest rates accompany this loan, and if you fail to make repayment, you may incur penalties.
You are given six months to pay off your loan. Therefore, check the period and the interest carefully. Some lenders may give you a month until your property is sold.
Remember that this loan will only cover a portion of the total cost of your property. You have other expenses such as administrative fees, processing fees, penalties, and interest fees.
Money lenders will not request an upfront fee but are allowed to charge not more than $60 for late payment and a 10% processing fee only when the loan has been approved.
Before applying for this loan, note that you are required to repay within a short period, and your property serves as collateral.
Follow these steps to apply:
If you are applying through a bank, prepare the necessary documents and follow the steps below:
If you are not a member of the bank, register at the bank you have chosen, then contact their representative to discuss the bridging loan with them.
After you get the information, visit the bank’s website, and check the required documents and eligibility. Submit the documents and wait for feedback from the bank. For licensed money lenders, follow the steps below:
Here are some points to note:
Speak the truth about your finances: This loan is short-term – therefore, you need to submit your credit history to the lender to check if you can repay.
Prepare the required documents: You may be required to have Option to Purchase (OTP), which shows you have an exclusive right to buy the property.
You will also need to prove your income, bank loan statements, CPF withdrawal statements, and assets.
Only work with a licensed lender: You can choose a licensed lender, but you need to compare terms from different lenders and select the one with the best offer.
In Singapore, licensed money lenders offer loans to those who do not meet bank eligibility criteria. They also have less stringent rules, which attracts more clients.
It is safe to choose a licensed lender since the government has regulations that bar them from charging higher than normal interest rates.
You should check the list of licensed money lenders from the Ministry of Law’s website.
Before approving the loan, the lender must check if you are eligible. Licensed lenders are normally flexible and lenient when offering their loans.
To be eligible, you should meet the following conditions:
You need to prepare the following:
Banks will request the latest CPF withdrawal and bank statements or more documents.
A money lender will charge you late payment fees, which should not exceed $60 monthly. As soon as your loan is approved, it will deduct a 10% processing fee that should not exceed the loan amount.
The law in Singapore regulates the charges that are put on each successful claim for debt recovery.
For a bridging loan, you can visit a financial institution such as a bank or licensed money lender. Although a bank is a reliable place to obtain this type of loan, they have strict procedures and will ask for your credit reports and financial history.
Banks will disqualify you if you have a poor credit score, which is why a licensed money lender may be a better option. Licensed money lenders have favourable terms, and you can always talk to them in case of a problem.
To find a licensed money lender, look up the list of licensed money lenders online. The Registry of Moneylenders updates the list to ensure those who don’t break the rules stay on the list and run their operations.
Now that you know how bridging loan works, you can decide if it’s a good option.
Although this may not be the case for everyone, a bridging loan can help plug the gap between selling and buying a new property.
Note that making any financial decisions requires proper research to ensure you get optimal outcomes out of your choices. This is no different when you opt for bridging loans.
For better terms and quick approval, check Katong Credit. We are a reliable licensed money lender that can help you select the best loan offers.