Getting a home of your own often involves a fair amount of struggle. In fact, buying a home can take a toll on your finances. Yet it is one of the most important things you’ll ever purchase.
So what happens if you don’t have enough funds?
Seeking help from your loved ones is an option, but it doesn’t always work out. This is where government-baked assistance and bank loans can help you upgrade your home.
The Singapore government has allotted a special kind of loan for such circumstances, called the bridging loan.
If you’re wondering what is bridging loan and how it can help you, read on to find out more.
What Is A Bridging Loan?
Bridging loans are meant to ease your financial transition as you move into a bigger, better home, or want to own multiple properties.
When you are going through the process of selling off and buying a new property, you may fall short of some money.
A bridging loan is essentially meant to “bridge” this monetary gap, to enable you to raise the required capital with ease.
In Singapore, a bridging loan is used to help homeowners comfortably clear all necessary payments for a new property.
It can be used to pay a downpayment or other property-related expenses while you wait for the sale proceeds from your old home to come in.
Here are some more details on getting a bridging loan in Singapore:
- A bridging loan is usually settled within a six-month tenure.
- The interest rate on a bridging loan is between 5-6% from most banks and licensed money lenders.
How To Apply For A Bridging Loan In Singapore
Bridging loans can be easily acquired from any Singapore bank that offers home loans. They are usually offered as a supplementary offering to ease the burden on new homeowners.
In Singapore, all the “big three” banks offer bridging loans, so you can choose from a DBS, an OCBC, or a UOB bridging loan to help supplement your property purchase.
To get approved by a bank for a bridging loan in Singapore, you must be able to qualify for a home loan.
Some banks may have a different criteria in place to apply for a bridging loan, but most banks in Singapore offering a bridging loan ask that you register with them for a bank account.
They then take into account all the information and documents that you submitted for a bridging loan application. Most banks get back to you within a few days.
But sometimes, you are not just strapped for money but also time.
Not only do banks take a considerable amount of time to approve your bridging loan application, they also require a high credit score, proof of a stable income, and steady employment before they approve your bridging loan.
How To Use A Bridging Loan To Lower Your LTV Ratio
The loan-to-value (LTV) ratio is a restriction imposed by the Singapore government to limit the loan amount a property buyer can borrow.
The LTV ratio determines the amount of money you can borrow from a bank to finance your property, and also how much downpayment you need to pay upfront.
Taking out a bridging loan can be an excellent method to lower your LTV ratio so you borrow less from a bank, but remember, you will have to bear the interest costs incurred on taking out a bridging loan.
Capitalised Interest And Simultaneous Repayment Bridging Loans
There are two different types of temporary bridging loans that you can acquire in Singapore, namely the capitalised interest bridging loan and the simultaneous repayment bridging loan.
If you are taking a capitalised interest bridging loan, the loan will cover the entire amount of the cost of acquiring your new property, and repayment will only begin after you have sold off your previous property.
With a simultaneous repayment bridging loan, you would be paying off your home loan and the bridging loan simultaneously.
However, the two types of bridging loans have no implication on the amount of time you have to pay back the bridging loan.
That is because the Singapore government has made it mandatory for a borrower to repay the bridging loan amount within six months of acquiring the money.
So as far as the practical aspect of taking out a bridging loan is concerned, you need to decide on whether you would like to “bridge” just the downpayment or would rather include a chunk of the home loan to be paid by a bridging loan.
How Much Can You Borrow With A Bridging Loan?
In Singapore, you can acquire anywhere between 15% to 20% of the total cost of your new property purchase with a bridging loan.
Other factors governing the amount of bridging loan are your citizenship status in Singapore, along with other qualifications and legal requirements.
You can use the money in your CPF to pay for a bridging loan, if the sale of your previous property is complete and if your CPF has been refunded.
But remember, any interest on the bridging loan must be paid in cash.
Is It A Viable Option To Pay Off A Bridging Loan With CPF?
It all boils down to your personal preference and circumstances at the moment.
You obviously only apply for a bridging loan when you are short of funds for your next property purchase.
Some may prefer to keep some cash for emergency situations – only opting for a bridging loan for this reason.
This is a logical step only when you are preserving ready-to-use cash, and not the funds in your CPF, as CPF has rather strict withdrawal terms.
It is also important to note that the interest rate on CPF is significantly lower than that on a bridging loan.
So if you have enough money in your CPF to cover the downpayment, opting for a bridging loan would be unwise, given its much higher interest rate.
But one size doesn’t fit all, and depending on your risk appetite and finances, it is not wrong to take a bridging loan and save some cash.
That is if you keep all additional expenses, such as interest and fees associated with taking out any kind of loan, in mind.
What to Know Before You Apply For A Bridging Loan
Depending on your personal preferences and circumstances, it is imperative that you have all the knowledge about what is bridging loan and how it works before you fill out a bridging loan application:
- Do not apply for a loan to pay off another debt. Applying for a bridging loan to pay off any existing property that you own is a strategy that almost always backfires. Acquiring new bridging loans to pay off previous debt doesn’t work out every time for most people.
- Be clear about why you need a bridging loan. These loans come with a higher interest rate and stringent policies, so be very sure of exactly why you need a bridging loan. Only borrow money when you are sure that it is extremely important, and not just to support a lifestyle that you cannot afford yet.
- Get into the nitty-gritty of the bridging loan terms with your bank. Analyse the interest rate, payback time period, any late or processing fees, and any other conditions associated with taking a bridging loan. Only take a bridging loan if you are sure that you will be able to pay it back according to the repayment schedule. Never apply for an amount that is more than what you need. If and when your loan is approved, make a budget so you can spend the money more wisely.
- Remember that your property will be used as collateral. So make sure you only take out the minimum amount you need, and that you will be able to repay it in time so as not to lose the roof over your head.
Documents Needed For A Bridging Loan
You now know what is bridging loan and have considered all aspects of taking a bridging loan. You have also taken its pros and cons into account, and would like to go ahead with your application.
For the application process, make sure you are indeed eligible for a bridging loan in Singapore while taking into account your citizenship status.
A good credit score will stand you in better stead with a bank.
You must be at least 21 years old and a citizen of Singapore, permanent resident, or foreigner who is selling your property in Singapore.
- Option to Purchase copy that states your right to purchase the property
- CPF withdrawal statements
- Bank statements
- Proof of residence
Alternatives To A Bridging Loan
So now you know what is bridging loan. If you did your sums but still don’t quite have enough, you can choose a trustworthy licensed money lender to supplement your funds and cover the cost of acquiring a new property.
Getting a bridging loan through a bank requires a good credit score and requires plenty of lead time due to the rigorous vetting process.
A licensed money lender is often quicker with loan approval, and has no stringer credit score policies.
The question is choosing the right licensed money lender in Singapore, especially when it comes to a property purchasing emergency.
We enable you to acquire easy-to-repay bridging loans at low interest rates.
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.