Perhaps after working for a few years, you and your partner will start to think about a home upgrade.
Maybe it is to move to HDB at a prime location, or to a condominium.
For that to happen, all you need is a bridging loan. Here is a complete guide to a bridging loan and the interest rate.
What Is A Bridging Loan & The Interest Rate?
The word bridging loan is related to the concept of a bridge loan. While upgrading from one house to another in Singapore, you often find yourself short of cash. This is especially true if it is your first time buying a new home.
If you are moving into your new home but is facing cashflow issues, then a bridging loan may be an option. How does the bridging loan work? What is the interest rate of a bridging loan? Let’s find out.
What Is A Bridging Loan?
A bridging loan is a short-term loan for a maximum of 6 months. It’s a short-term solution to get you into your next home while you wait for the proceeds from the sale of your current property and any downpayment on your next one.
With a bridging loan, you can close on your new property sooner than if you had applied for traditional financing through banks and other lenders. The money you would have used on a downpayment could be used instead on closing costs to ensure that everything is ready when it comes time to move into your new home.
It’s ideal for home buyers running out of finance but still need to move to a new home that can accommodate their family. Here are some fundamentals of bridging loans.
Basics of Bridging Loans in Singapore
|Maximum Amount To Borrow||The maximum amount of bridging loan to borrow in Singapore is capped at CPF balances and the net proceeds from the approved sale of your old property.|
|Maximum Repayment Period||The maximum repayment period for bridging loans ranges from 3 months to 6 months depending on the lender and their credit history.|
|Interest Rate||Might vary from one lender to another but the general interest charge is 5% to 6% p.a.|
How Does A Bridging Loan Lower My LTV Ratio?
A loan-to-value (LTV) ratio is the lending risk that financial institutions consider before approving your mortgage.
Bridging loans lower your LTV ratio because they add equity to your property while you wait to sell your home. This means you have less equity in the house, which lowers its value as far as lenders are concerned.
If you have less than 20% equity in your property, then your LTV ratio will be higher than it would be if you had 20% or more equity in your home.
A typical bridging loan will have an LTV of 80% to 90%. This means that the value of your home would be reduced by 10% to 20% if you were to sell it immediately after taking out a bridging loan.
Let’s take a little calculation to get a better understanding.
Example Of A Bridging Loan (Calculations)
When buying your new house, you go for a loan that the lender offers, considering your LTV ratio. This measures the risk the lender is getting himself into.
Let’s say your new property is worth S$1,200,000, and your maximum loan quantum is S$960,000, which means you have an LTV ratio of 80%.
The new property needs a downpayment of S$300,000, and the sale of the previous property is S$600,000.
- Value of New house: S$1,200,000
- Optimum quantum amount: S$960,000 (80% LTV)
- Downpayment (Non-cash): S$200,000
- Total net proceeds sales- old house: $600,000
In this case, you can take a bridging loan of S$200,000 to pay for your downpayment plus $40,000 of your savings if you have and add the S$960,000 you took from the bank to pay for the new house.
Or In the same case, you can also take a bridging loan of S$600,000, meaning you will borrow a loan of S$600,000 (50%) from the bank and pay for your house.
When you buy a property, you must pay for it in full. Your LTV ratio is the percentage of the property’s cost you will be paying for. To lower your LTV ratio, look at bridging loans as an option when buying a home. It gives you the advantage of borrowing less from banks.
What Is The Interest Rate For Bridging Loan?
Bridging loans are typically for six months or less. They are not secured by your existing property but by your second home, which is why they are called “bridging” loans.
A bridging loan interest rate is usually higher than regular bank deposits, which is considered risky. The interest rate varies depending on the lender, but it is usually in the range of 5-6%, with some lenders charging even more than 7%.
How & When Do I Apply For A Bridging Loan?
When looking for a bridging loan in Singapore, it is essential to know what to consider. There are many things you should consider if you are to apply for a bridging loan in Singapore, and here are the most important ones:
The Reason Behind Requesting For A Bridging Loan
It is always good to know why you need a bridging loan.
It will help you better understand how much money is required to pay off your credit card debts so that when applying for the loan, it will be easier for the lender to approve.
The Amount of Money You Have on Hand (could be savings)
When you think of buying your next home, your first thought is of how much money you have.
For example, you will not need a bridging loan if you run a business and have about S$500,000 in savings, which is enough to cater for a downpayment. But if you are running short of finances and there is a lot of pressure in upgrading to a new home, apply for a bridging loan.
You can also find out if there are other sources like family or friends who may be willing to help with this arrangement. This way, there will be no surprises regarding your finances, and they can also help with the payments.
Amount of Money You Want To Request For and The Interest Rate
The amount of money you need to borrow is not fixed as it depends on how much you can afford to pay back every month and how quickly you need it.
How To Apply For A Bridging Loan?
If you are looking for bridging loans near me locations, you just need a quick google search. However, you can also check for banks near you that offer bridging loans or visit the bank you have been borrowing and saving cash. Nowadays banks allow borrowers to also apply online.
You must first complete the application form for your bridging loan and submit it to the bank. The bank will then assess your eligibility for the loan, which is usually based on your credit history and financial situation. You may be asked to provide additional information, such as tax returns or proof of employment.
Some bridging loan providers review your request and give out options without much paper proof.
Once this is done, they will give you a loan agreement that details all the bridging loan terms and conditions, including interest rates and repayment schedule. You must sign this document before taking possession of your new property.
Is There A Way To Get A Bridging Loan Fast?
Due to red tape and many regulations, certain banks and other financial institutions may take a long time to get back to you.
To get a bridging loan fast in Singapore, large financial institutions such as Lending Bee can help you!
Borrow up to $2 million for secured loans. Simply apply via Singpass here!