What Is A Bridging Loan And Should You Apply For It?

It is probably an understatement to say it is a daunting task to sell your property in Singapore.

But all is not lost.

Thinking of selling your home but do not have enough downpayment to pay for your next property purchase?

Consider getting a bridging loan.

If you’re wondering what is a bridging loan, it is normally used by homeowners who want to purchase new property but do not have enough money.

A bridging loan will cover the shortfall when you are still waiting for the funds to come in from the current property you are trying to sell.

Applying for a bridging loan in Singapore makes the process of selling property a lot easier.

This article will tell you what is a bridging loan in Singapore, as well as everything you need to know about the process of applying for one.

If you can’t get a bank loan, you can find a licensed money lender that offers bridging loans.

Bridging Loan Vs Temporary Bridging Loan 

One significant issue homeowners experience when they want to sell their property is the lack of cashflow.

While waiting for your existing property to be sold, you might want to get a new loan even if the sale proceeds from your current property could cover the new property purchase.

A bridging loan can help you to “bridge” this shortfall in funds.

Since your bridging loan acts as your new home’s mortgage, it will automatically be redeemed from the sale proceeds of your current home.

This allows you to use the sale proceeds from your existing home to finance your new purchase without committing yourself to a long-term mortgage.

To be eligible for this kind of loan, you should have bought a new home. Its keys should be ready for collection and you should have been offered an application to sell your current property.

It would also help if you had enough cash from the sale proceeds to be able to redeem the loan.

A bridging loan is different from a Temporary Bridging Loan Programme (TBLP), which refers to financial aid given by the government to assist businesses in accessing working capital.

What Is A Bridging Loan?

A bridging loan is a short-term property mortgage finance. Such loans help in funding your property for a short period.

A bridging loan can help you to sell your home or settle a long-term shortage.

It is normally offered for one to eighteen months – provided that you repay the loan within the allotted time.

The application process for a bridging loan is generally simple. The bridging loan can be used in these ways:

• Stopping repossession
• Immediate purchase of property such as auction buying
• Buying a property below the market value
• Financing conversion work or restoring property
• Buying a property that is in bad condition

When you take a bridging loan from a licensed money lender, it offers you the money for buying your new property and takes a mortgage on the existing property.

Also, the money lender can change the original loan status – for instance, by offering you the option of interest-only repayments or minimising the loan term.

But there will be fees to incur during the process, such as charges for loan alterations.

Bridging Loan Interest Rates

Bridging loans are expensive, so don’t cringe when you find out that the interest rate is higher than the typical home loan rate.

The interest rate for a bridging loan usually ranges from 5-6% per annum, which is high.

But depending on the bank, you can pay the interest first and pay off the bridging loan only when you have collected the sales proceeds from your old property.

If you are intending to get a loan from a licensed money lender, it can only charge a maximum interest rate of 4% per month.

This rule applies regardless of whether it is a secured or unsecured loan, or your salary.

In addition, failure to pay on time will attract late interest fees. Therefore, you need to consider whether you can make the monthly payments on time.

How To Apply For A Bridging Loan

Most banks in Singapore use the same application process for bridging loans.

However, some may need special requirements when applying for a loan, so be careful of those requirements.

To get started, you’ll need to register for a bank account. When this is done, talk to a representative to discuss the bridging loan application.

Sign in to the bank’s online resources for bridging loans. Submit your proof of eligibility and other necessary documents. Next, wait for the results.

For HDB loans, banks usually ask for Option to Purchase documents, your latest bank statements and your CPF withdrawal statement.

Should You Get A Loan From A Bank Or Money Lender?

Although banks may be an efficient way of getting the financial assistance you need to get your home, you can consider a licensed money lender instead.

Using a licensed money lender comes with more benefits compared to a bank.

For instance, you can usually obtain an unsecured loan from a money lender. This means you won’t have to offer your current home as collateral.

In addition, short-term loans from licensed money lenders don’t always require the borrower to have a good credit score.

This makes it a better option if you have poor or no credit. The Ministry of Law in Singapore set a minimum interest rate at 4% for licensed money lenders, meaning you will also pay reduced rates.

Money lenders use the same application procedure as traditional banks. To make an application, follow these steps:

• Visit its website or give the lender a call.
• Fill out the forms provided or answer all its questions over the phone.
• Give the lender your eligibility and support documents through its appointed channels, then wait for refinancing from the lender.

To be eligible, money lenders require applicants to be at least 18 years old.

A Singaporean should earn $1,500 per month, while foreigners should earn $2,000. As an applicant, you should have exercised the Option to Purchase.

Documents that your money lender may require include:

• Proof of income and employment
• Copy of Option to Purchase
• Proof of residence
• NRIC
• Singpass

What Is A HDB Bridging Loan?

This kind of loan functions like any bridging loan.

It allows you to pay your new property’s downpayment and initial expenses before you sell your former property.

This means you can purchase a HDB flat without worrying about missing your chance while awaiting your total sales proceeds from your current home.

How To Use The Bridging Loan To Lower Your LTV Ratio

One good thing for using a bridging loan to purchase a property in Singapore is that it lowers your Loan-to-Value (LTV) ratio.

The LTV ratio is the percentage of the value of the property financed by the loan. When you have a higher LTV ratio, it means you are borrowing higher amounts, and the chances of defaulting are high.

A bridging loan can lower this ratio by offering the required funds for the property as a downpayment. This will reduce the loan amount and, subsequently, the LTV ratio.

How do you reduce the LTV ratio?

Let’s say you are waiting for $550,000 worth of sales proceeds from your current property.

You also want to purchase a $1,000,000 home. Your existing LTV could be 60%, meaning the bank will cover $600,000 – therefore, you have to look for the remaining $400,000.

Suppose you take a $500,000 bridging loan to settle the amount. When you receive your sales proceeds and repay the amount, you have $150,000 remaining in your account.

In this case, you will have to pay penalty fees up to 1.5% of the remaining amount in the account.

How Much Can You Borrow With A Bridging Loan?

Most money lenders offer a bridging loan that is below six figures.

However, the amount you receive depends on various factors. These include your interest rates, product type, the value of the new property, asset value, and financial needs.

Banks can offer 15-25% of your home value, while money lenders can offer up to six times your monthly income if your annual salary is more than $20,000.

Can You Use CPF To Cover The Bridging Loan?

Yes, you can use your CPF to cover the bridging loan immediately after you get the sales proceeds from the sale of your old home.

Your CPF savings are refunded, and you can use the funds to service your bridging loan.

But you must pay the interest with cash. In the case of a licensed money lender, you must repay the bridging loan by either bank transfer or cash.

What To Know About A Bridging Loan

As mentioned, bridging loans in Singapore help to bridge the gap between the time you require to have funds to offer for the downpayment of your new home, and when you receive the sales proceeds from your previous property.

They provide a good opportunity to home movers and real estate owners facing delays in getting proceeds from their old property to move to a new home.

However, you should note that bridging loans and mortgages are not similar.

A bridging loan was designed for the specific function of addressing the payment gap between two properties.

Also, loan servicing will change during the bridging term. Based on the loan structure, you may only be required to pay for the existing mortgage.

Similarly, loan repayment may be higher after the period than before you got the bridging loan because you will be servicing two loans simultaneously.

The advantage of this kind of loan is that, even though it has a higher interest, it has a short term. This indicates that the total amount of interest you should pay is small.

Alternatives To A Bridging Loan

While taking out a bridging loan can be an efficient way to finance your property, there are several alternatives that you can consider.

Go To A Bank Or Licensed Money Lender 

Depending on the lender, licensed money lenders and banks can offer personal loans to eligible Singaporeans and foreigners for up to six months of their monthly salary or beyond.

If you check their offers, you can easily see how personal loans can serve as bridging loans.

To qualify for a bank loan, you should have a good credit score, while Singaporeans and foreigners should be 21 years old and above.

Also, as a borrower, you should sell the property and have proof of ownership.

On the other hand, money lenders offer better conditions, such as you must be 18 years and above and earn $1,500 per month. Foreigners should earn $2,000 every month.

Licensed money lenders offer up to six months of your monthly salary and give up to 12 months to complete the payment.

Get A Housing Loan 

Most buyers view a property as a long-term financial responsibility, which is why they would get a housing loan to pay for the purchase.

As a buyer, you should consider the required payments and the monthly housing installments before making a decision.

You can finance your property by obtaining a loan from a licensed money lender or bank that the Monetary Authority of Singapore regulates.

The financial considerations you should make before a property purchase include:

• Repayment period
• Minimum cash payment
• CPF utilisation
• Priority of payment
• Interest rate
• LTV limit
• Refinancing

A Bridging Loan Can Be A Viable Solution 

When deciding if you should purchase a home, you should note the costs involved. Research about the availability of the market for the listing so you can benefit from it.

Offerings will depend on your lender, so check all the available options. Usually, making any financial decision requires you to conduct comprehensive research to ensure you benefit from your choices.

So if you need a reliable lender for your bridging loan, you can always depend on Katong Credit for the best solutions.

Think about what type of bridging loan to take?

Contact us at Katong Credit and we will help you understand the whole process, or apply for a loan with us now.