Let’s say you’ve decided to sell your home and buy a nicer property.
You have already completed the sale and purchase agreements and will have to put down money as soon as possible to secure your new home.
But as you are still waiting for the sale proceeds of your current home to come in, you don’t have the funds for the downpayment. One way to bridge this gap is to get a bridging loan in Singapore from a bank or licensed money lender.
This article will explain how bridging loan works, how to apply for one, and what to look out for.
What Is A Bridging Loan?
Bridging loans, or bridge loans, are short-term loans commonly used to bridge the gap between two property transactions.
Usually, you get a bridging loan from a bank or a money lender so that you can pay the downpayment on your new home before you get the money from selling your old property.
Most banks offer bridging loans at an interest rate of about 5-6% per annum, which is pretty high. Bridging loans usually have a loan tenure of about six months.
In Singapore, you can choose from two types of bridge loans.
Simultaneous Repayment Bridging Loan
This bridging loan requires you to pay off your home loan for your new home and the bridging loan concurrently. This can be a pretty stressful option.
Capitalised Interest Bridging Loan
For this type of bridging loan, the lender pays for the entire purchase price of the new home you want to buy.
Your mortgage payments only start after you sell your old residence. Between the two, it is the better option if you don’t want to juggle two loans simultaneously.
However, you need a good credit score to be eligible for this type of bridging loan.
How Much Can You Borrow With A Bridging Loan?
The amount you can borrow with a bridging loan depends on how much your property is worth. It also depends on the lender.
Since bridging loans are usually used for your downpayment, you should be able to borrow about 20% of your property’s value.
But your lender may allow you to borrow more if your property transaction proves to be lucrative. In other words, you are selling your home at a higher price than what you are paying for the new property.
Under such circumstances, a lender is likely to feel assured of your repayment ability since you will have more than enough money to pay back the bridging loan.
In fact, the lender may even allow you to borrow more than the 20% limit, especially if firstly, your income is relatively high, and secondly, your credit score is excellent.
When To Apply For A Bridging Loan
So you have a better idea of how bridging loan works. But when exactly should you use one? Here are a few situations when a bridging loan may come in handy.
Before Listing Your Renovated Home For Sale
Do some renovation work to get a better price when you sell your old home.
As home improvement can eat into your savings, a bridge loan may be ideal in such a situation. Alternatively, you could apply for a loan.
For An En Bloc Sale
Was your home part of an en bloc sale? If so, you would need a new home as soon as possible.
So if you need money quickly, bridging loans come in handy. You probably wouldn’t want to wait a few months in a market where home prices keep rising. You should quickly obtain a new residence without delay.
When You Are Buying A Bigger Property
Many often use a bridging loan for property upgrading. For example, you might decide to trade in your HDB apartment in favour of private property.
The initial investment may be pretty high, so a bridging loan could help pay the deposit and other costs if you don’t have enough savings.
What To Consider Before Applying For A Bridging Loan
A standard bridging loan can cover at most 25% of the purchase price of your new property. You shouldn’t assume that just because you can get a loan for that amount, you necessarily should.
Only borrow what you need because of the high interest rate and short loan tenure. In other words, borrow just enough to cover the downpayment and close the deal on the property.
There is no standard loan term length because the terms are set by lenders, but usually, banks need you to pay back a bridging loan within six months. So think very carefully about how much money you can borrow and pay back.
A bridging loan may be a short-term loan used in the place of a permanent mortgage.
Yet, it is much more expensive than a traditional mortgage. Its interest rates are also significantly higher. The average rate charged by banks is between 5-6%.
It’s possible to pay the interest on your loan first. However, this depends on the lender. As soon as you receive the sales proceeds from our current home, you should use the money to repay the bridging loan.
In contrast, licensed money lenders can only charge an interest rate of up to 4% interest per month. This applies regardless of your income, or if your loan is secured or unsecured.
Answer these questions before applying for a bridge loan: If your income falls short, do you have savings to fall back on? If you add this to the mortgage on your new home, will you be able to afford the monthly repayments?
Remember that there are interest fees associated with bridging loans. Furthermore, late payments are subject to higher interest rates and other costs.
So think about whether you can afford the monthly installments.
Assess Where You Stand Financially
It’s a temporary loan, hence the name “bridging”. To secure a bridging loan, you’ll need to show the lender that you’re a responsible borrower who can make timely payments.
Prepare The Necessary Paperwork
Your Option to Purchase (OTP) contract proves your exclusive right to acquire a property.
So before you apply for a bridging loan, you need your income documentation, a copy of your credit report, and records from any active bank loans you have. You will also need your CPF withdrawal statements.
Have A Plan B
Your ability to repay a bridging loan on time or early is an essential consideration for the lender.
You might incur additional fees if you don’t repay the loan by the due date, or if you do so too early. Without a backup strategy, you’ll probably incur more expenses or have to find temporary lodging.
Now that you have the above tips, you can pick a trusted licensed money lender like Lending Bee from which to get a bridging loan.
Factor In Other Costs
The total cost of a bridging loan is not just the sum of the principal and interest amount. You should also take the following associated costs into consideration:
- Interest repayments
- Administrative/processing fee
- Late fees or penalties
How A Bridging Loan Can Lower Your LTV Ratio
A bridge loan can lower your loan-to-value (LTV) ratio. What does the LTV ratio mean, then?
It’s the maximum sum of money a lender will let you borrow to buy a property. So if your LTV ratio is 75%, you’d be able to borrow up to 75 % of the value of your home. A low LTV ratio is one method of preventing borrowers like yourself from taking on too much debt.
There’s a good chance you’re wondering why you should reduce the LTV ratio and how bridging loans works.
Borrowing more money from a lender, as shown by a higher LTV ratio, increases the likelihood that you will default on your loan payments.
Bridging loans are helpful in such situations. It can help you reduce your LTV ratio by providing the money you need for a downpayment. When you pay more upfront, the loan amount you need decreases, bringing your LTV ratio down.
Here’s an example:
If the purchase price of your new home is $1,000,000 and your LTV is 75%, then you will need a $750,000 loan.
If you estimate that you will receive $500,000 from the sale of your current home for the non-cash portion of the downpayment, you can apply for a bridging loan of $200,000 and use the additional $50,000 to cover the downpayment.
At that point, you most likely have not yet received the $500,000 in cash from selling your old property. Your choices are:
- To avoid the prepayment penalty, you can accept the 75% LTV and pay off the loan in a lump sum of $200,000.
- Raise the amount of your bridging loan to $500,000.
If you do this, you’ll need to only borrow $450,000. This will bring your LTV down to 45% now. When you sell your current home, you can use the money from the sale to pay off your bridging loan.
The only catch is that interest rates will be higher because of the larger amount ($500,000). The most crucial point to remember about bridging loans is that many choices are available to help you reach your financial goals.
Having more bargaining chips reduces stress about money.
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 unfortunately the sale of your old home fell through, you haven’t sold it, and worse, you’re stuck with the bridging loan.
The good news is you can use your CPF savings and refund the money once you have sold your property. But remember that you will have to pay an interest amount to the fund in cash.
So if you have enough CPF savings and can pay the interest amount on top of it, you can use your CPF to pay for your bridging loan.
Where To Get Bridging Loans
You can go to a bank or legal money lender. Getting a bridging loan from a bank is safe, but banks will look at your credit score and income.
There are other options, such as money lenders, to consider if your credit is not perfect. There are many benefits to working with a licensed money lender, such as:
- Flexible payment terms
- A good credit score isn’t necessary
- Easier to qualify for
- No upfront fees
Licensed money lenders charge:
- An interest rate of no more than 4% per month
- A maximum of 10% processing fee upon loan approval
- $60 for each late repayment
- A late interest rate of no more than 4% per month
- The monthly interest rate, late interest rate and administrative fee must not exceed the loan amount
You can find a licensed money lender by looking up the Ministry of Law’s list of approved money lenders in Singapore. This list is updated monthly.
All legal money lenders in Singapore have to comply with the rules and regulations in the Moneylenders Act.
How To Apply For A Bridging Loan
In Singapore, you can get a bridging loan from a bank or licensed money lender.
Here’s what you’ll need to do:
- Register with the bank.
- Talk to the bank’s representative about a bridging loan application.
- Access the bank’s online bridging loan portal.
- Upload the required documents.
- Finalise and submit the application.
But note that most banks have fairly strict requirements. If your credit score is not great, licensed money lenders may be a better option.
Licensed Money Lenders
Applying for a bridging loan from a legal money lender is much simpler, not to mention quicker.
Here are the steps:
- Contact your licensed money lender through email or phone.
- Fill up its 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.
These are the eligibility requirements for most money lenders:
- You must be at least 18 years of age (banks need you to be 21 at least)
- You must have valid citizenship or permanent residency status
- You must be earning $1,500 per month ($2,000 if you’re a foreigner)
- You must have the Option to Purchase (OTP) from the seller of the property
You will also need the following documents:
- Salary slips and employment letter as proof of income and employment
- NRIC (for identity proof)
- Property documents as proof of residence
- Singpass to access CPF, IRAS, and HDB websites
- Copy of the OTP
Be Clear About How Bridging Loan Works
Understanding how bridging loan works is important because it is a short-term loan that comes with a certain level of risk.
It can be used to “bridge” a lack of funds as you wait for the sale of your current home to conclude, while trying to pay the downpayment loan for your next one.
But there are fees involved, so you must ensure you can afford them.
With Lending Bee, a licensed money lender, you can receive quick approval for a bridging loan without requiring stringent paperwork and processes.
About Ashley Sim
Calling herself a “professional multi-tasker”, Ashley worked as a relationship manager in a bank for five years. She left her job just before the pandemic happened and became a freelance writer for about a year. Now, she’s making the most of her love for writing and knowledge of the banking and financial industry in her role as a content marketing lead. She hopes to help people make better financial decisions through her content and campaigns.