Purchasing a property and selling your old one is a big decision that you need to think carefully about.
But inadequate funds might get in your way.
Fortunately, a bridging loan is a perfect financial solution to facilitate the purchase.
How long does it take to get a bridging loan, and what should you know? Let’s find out.
Picture this. You are on the verge of selling your old property and acquiring a new one but don’t have the required funds to facilitate the purchase.
As a potential homeowner, you can consider a bridging loan to make a downpayment as you wait for proceeds once you complete the sale.
But first, what is a bridging loan in Singapore?
It refers to a loan that you can get from a bank and in so doing “bridge” the time you need to make a downpayment for a new property and until you get the proceeds for a property you have sold.
To better grasp what a bridging loan means, think of it as a solution to facilitate property acquisition when you are looking for money to make a downpayment.
Once the bridging loan is approved, the money lender presumes the financing role of your property.
Next, you will start making the monthly payments towards clearing your bridging loan. The loan tenure is usually six months.
You might consider getting a bridging loan if you don’t have adequate cash to facilitate the purchase requirement from the bank giving you a home loan.
Since a bridging loan is a secured loan, the money lender could seize your property if you default on the loan or fail to sell the property.
Note that you can only take a bridging loan in Singapore if you have assets to secure the loan to prove that you can afford it.
Here are a few things to note concerning a bridging loan:
In general, A bridging loan could be a perfect funding alternative if you are struggling to raise a downpayment yet want to acquire private property.
A bridging loan is not instant. It will take approximately 72 hours for you to get funds.
It takes longer for a bridging loan to be approved because of its complexity in determining eligibility.
A money lender will check specific details, such as evaluating the property’s worth, before approving a request.
Since approval is subject to criteria of lenders, it will help if you find a money lender who can approve a bridge loan in less than 72 hours. One example is Katong Credit.
There are two types of bridging loans – capitalised interest and simultaneous payment.
This refers to where you can acquire a loan with a flexible repayment plan. Technically, the money lender adds the unpaid interest to the principal balance of your bridge loan and pays it. The lender can only activate the loan once your property sells.
This is a good option if your servicing capacity may be an issue because of the interest you incur in repaying multiple loans.
In this type of bridging loan, a lender requires you to make simultaneous payments for the bridging loan and new property.
The repayment period can be extended to 12 months, allowing you more time to sell your property.
If you are sure about buying a home but cannot raise the downpayment by yourself, a bridging loan seems a good idea.
But before committing to a bridging loan with a money lender, consider the following:
The cash you have on hand is a significant consideration because it informs you how much you need to complete the sale and purchase agreement.
The funds in your CPF Ordinary Account (OA) has restrictions and may not be readily available, but you can use the money to make a downpayment.
If the funds in your CPF can cater to the investment, you can disregard the bridging loan idea.
Tip: Take a bridging loan to meet the downpayment need or finance a lucrative idea like a start-up or a mortgage.
A bridging loan mainly finances up to 25% of the property purchase, not its total cost.
Since the loan tenure and high interest rates can be daunting, it will be best only to take the required amount to facilitate the downpayment transaction.
The main reason you should take a bridging loan is to get funds to facilitate the gap between selling an old property and acquiring a new one.
If you want the funds to cushion you from emergencies and financial crises, you are better off without a bridging loan because of its total costs.
Bridging loans are short-term (up to six months), but have higher interest rates.
The property’s value is vital in determining total costs and could be why you opt for a bridging loan.
You can do your homework earlier and calculate the miscellaneous fees, interest charges, and total costs to know how much you will pay.
However, ensure you can make the monthly repayments (including interest) without struggling.
Simply put, bridging loans come with significant risks that you must evaluate and ensure you are comfortable with.
For example, the short loan tenure, high interest rates, and the usage of the new property as collateral might be things to consider very seriously.
Think about the worst-case scenario, such as your property not selling. Then ask yourself: Do you have a way out of it?
While thinking about your options, find out from your money lender about penalties if your property doesn’t sell within the loan tenure.
Before deciding, inquire about exit clauses, and how you can adhere to the terms and conditions without stretching your finances further.
Having a back-up plan confirms to the money lender that you can repay the loan within the required period.
When taking a bridging loan, the maximum amount you can get is subject to your net proceeds and CPF balances from your old property.
Since bridging loans can be costly, knowing how to reduce your LTV ratio is critical. How?
A bridging loan provides you the amount you need to make a downpayment. Let’s break that down.
Suppose you are acquiring property costing $1 million with a 75% ($750,000) loan quantum.
From the sale, you are likely to get $500,000.
You can take $500,000 and add an extra $50,000 from other sources to cover downpayment costs.
That said, you may not end up getting $500,000 from the old property proceeds.
As you can tell, the LTV ratio could be higher, but you have two options to reduce the total costs:
While you have options to ease your financial burden, the bridging loan interest rate could be higher but cannot exceed 20% of the property being sold.
Even though a bridging loan can help you cover costs you initially could not manage, evaluating its advantages and downsides can help with your decision-making.
Here is how to apply and get a bridging loan hassle-free:
Note that you can apply online or at physical premises at the money lender’s office.
Are you planning to own new property but cannot afford a downpayment?
At Katong Credit, we specialise in various financial services to cater to diverse needs.