How To Calculate A Bridging Loan In Singapore

While trying to acquire a new property, you might face a situation where you have yet to sell your old home. But you may not have the money to pay for and move into your new home.
You’ll have to find a way to finance your housing charges during such a period.

Getting a bridging loan might be your best way out.

However, before applying for one, you need to understand how a bridging loan works, and how to calculate bridging loan.

In this article, you’ll learn everything you need to know about bridging loans and what factors you must consider before applying for them, including how to calculate bridging loan.

Why Do You Need A Bridging Loan?

Out of the numerous reasons you may need a bridging loan, here is a list of four primary reasons:

Financing The Purchase Of A New Property

As mentioned above, you might get caught in a situation where you’re acquiring a new property to move into with the money generated from selling an old property, but the sale isn’t finalised yet.

Taking out a bridging loan is the perfect way to tackle this situation, as it literally “bridges” the financial gap by equipping you with the money you require to buy the new property.

Furthermore, once you receive the proceeds from selling your old home, you can use it to repay the loan.

Purchasing A Property At An Auction

Have you recently secured the winning bid at an auction for a new property? Generally, you should expect to pay 10% of the total amount as a deposit on the same day as the auction.
But the remaining cost also needs to be paid soon after. This requirement can become an issue for many as a mortgage may take almost a month to mature.

A bridging loan eliminates all concerns of being unable to complete the auction purchase in the necessary time frame as they’re quickly accessible. Also, you can repay it once the mortgage comes into effect.

Funding A Renovation

At times, it can be almost impossible to finance property renovations through lenders as they might deem the property to be ineligible for a mortgage in its present state.

Since small renovations and refurbishments take a short time, getting a bridging loan may be the most viable option.

Bridging loans for refurbishment is useful for renters and property developers who wish to improve the current state of a property before renting it out to new tenants.

Buying A Commercial Property

To become a successful real estate investor in Singapore’s supremely competitive property market, you must be able to act in the blink of an eye when an opportunity arises.

This is why as a property investor looking to buy a new commercial property, you need immediate access to funds. This requirement might be troublesome, especially if your money is tied up in other assets.

As traditional money lenders and commercial mortgages are a more complex way of getting funds, bridging loans are a simpler option for commercial property.

How Can A Bridging Loan Help?

Here’s a working illustration of how a bridging loan can help you gain a financial advantage while buying a new property.

Assume that you’re about to sell your old property to buy a new property that isn’t entirely constructed yet.

Moreover, you’ll only receive the sale proceedings in the form of cash and funds in your CPF after six months.

So let’s say you’re purchasing a new $2,000,000 property and the following apply:

• Downpayment (5% cash): $100,000
• Downpayment (20% cash and CPF): $400,000
• Loan amount (assuming 75% LTV): $1,500,000

Let’s assume you’ve paid the 5% cash downpayment but lack the cash or CPF funds for the 20% downpayment. This may happen because you’ve not yet received the proceeds from selling your old property.

In this case, you can still complete the purchase of the new property by getting a bridging loan of $400,000 to bridge the gap.

What To Consider Before Getting A Bridging Loan

Like any deal that’s too good to be true, bridging loans come with their fair share of risks. You need to know a few things before getting a bridging loan.
So do take note of these points.

You Are Putting Your Property At Risk

Money lenders and banks use your property as security against your repayment of the bridging loan. As a result, if you don’t wish to risk losing your real estate, you must ensure that you possess the financial capacity to repay the loan on time.

Do A Proper Property Valuation

As a rule of thumb, before you even ponder over getting a bridging loan, you must ensure that you’re not over-estimating the value of your property.

You’ll have a massive financial problem on your hands if you miscalculate the value of your property. So it’s best to engage the services of a professional valuer.

Capitalised Interest Vs Simultaneous Repayment Bridging Loan

The first type of bridging loan is known as capitalised repayment bridging loan. This kind of bridging loan covers the whole value of the new property.

In addition, with this sort of bridging loan, the repayments only begin once you finalise the sale of the old property.

On the other hand, simultaneous repayment bridging loans work differently. If you apply for such a loan, you’ll have to repay your housing and bridging loan simultaneously.

How To Apply For A Bridging Loan

Licensed money lenders like Katong Credit make the application process for bridging loans extremely simple for you.

You just have to provide them with the necessary details, and they will effectively work out a loan package most suitable for you.

Also, given that a bridging loan is a short-term loan, you must meet the eligibility criteria and submit the necessary documents. This allows the money lenders and banks to assess your capability to repay the loan.

The eligibility criteria and documents required to qualify for a bridging loan are as follows:

Eligibility

• Singapore citizenship
• Permanent resident (in the process of selling their property in Singapore)
• Foreigners (in the process of selling their property in Singapore)
• Good credit score

Documents Required

• Option To Purchase (OTP) document
• CPF withdrawal statements
• Outstanding bank loan statements

How To Calculate Bridging Loan

You must be aware of the following figures to be able to calculate a bridging loan appropriately:

• Downpayment amount on the new property
• Outstanding balance on current mortgages
• Fees charged by the money lender

So let’s assume that the valuation of your old property amounts to $1,000,000. In addition, let the outstanding mortgage on the same property be $600,000.

Let’s say that the money lender qualifies you to take 80% of the old property’s value to put up as cash and reimburse the remaining mortgage.

Also, let the fees and interest charged by the money lender are 1% and 2% of the mortgage amount, respectively.

So the charges amount to 3% of $600,000, which is $18,000.

Upon removing the sum of extra costs and the outstanding mortgage from the bridging loan, you get $182,000. You can use this amount to bridge the gap and pay the downpayment on your new property.

Fees And Charges

Applying for a bridging loan may involve  hidden fees based on the money lender you opt for.

Commonly, there are a couple of fees charged by money lenders.

1. Late payment fee:  This varies between 3-5% of the bridging loan amount.
2. Processing fee: These fees lie anywhere between 1-3%.

Katong Credit is a leading licensed money lender in Singapore that believes in charging minimum fees for processing applications and late payments to reduce the financial stress of loan takers.

Get in touch with us now or apply for a loan using your Singpass today. It just takes five minutes.