Should You Apply For A Bridging Loan In Singapore?
Over 80% of Singaporeans live in HBD properties. However, as time goes by, some may decide to sell such properties and upgrade.
However, even after selling, or awaiting the completion process, one may not have enough funds to immediately purchase another property.
Indisputably, the transaction process of the sale of property takes longer than expected. Such a situation may leave home movers in a distressing situation.
If you’re planning to sell your old property or HDB property and get a new property, you may have thought of applying for a bridging loan in Singapore.
The first step is to have the right information to ease your financial transition.
In this article, you will find out what is a bridging loan in Singapore, how much you can borrow, how to use it, and more.
What Is A Bridging Loan?
A bridging loan is a type of short-term loan taken for a short time frame.
As its name suggests, it helps to bridge the gap between the time needed to pay a downpayment of a new property to when you receive your sales proceeds from your old property.
The bridging loan can also be used to buy land for property development, purchase property at an auction, deposit on a property, and much more.
In short, a bridging loan can cater to any need – provided you have an asset for security and are capable of paying it.
While a bridging loan is a good idea, you must weigh the pros and cons to help you know whether it’s the right move or not.
Pros And Cons Of Bridging Loans
- They are reliable. You can secure a property whose purchase duration may be short – such as during auctions
- They are flexible, they don’t follow the “tick box” criteria and such are tailored to suit the borrower’s needs
- You get speedy transactions – you can get a bridging loan within three days (though it can also take weeks)
- You can borrow a large sum of money
- The interest rates are high, around 5-6%, as compared to home loans
- The fees and charges are high
- It can be risky as your property or any other asset may be sold to recover the loan in case of defaults.
Note that there are two types of bridging loans in Singapore:
- Capitalised interest: This is where accrued but unpaid interest is topped to the principal balance of your bridge loan. This means that the bank pays the entire amount of the new property and your loan gets activated when your original property is sold. It’s a good option for those who don’t want to service two loans simultaneously.
- Simultaneous payment: You make payment for your new property and bridging loan simultaneously. You’re given a period of 12 months to sell off your property and hence repay your loan. Though a good option, it may be tedious for some.
Bridging loans helps borrowers take the advantage of their short-term nature.
In addition, the application process is not complicated – provided you have the right information.
How To Apply For A Bridging Loan
Before you take start to fill in bridging loan applications, keep in mind that such loans are designed to be paid within a short period of time.
Your existing property becomes the loan collateral. Below are the steps to apply for a bridging loan:
- You make an online application.
- The lender runs a credit check.
- The lender accepts or denies your application.
- Valuation and background checks take place.
- If you qualify for the bridge loan, funds are sent to your account.
To ensure a smooth application process, know what is expected of you as a borrower:
- Be clear about your financial situation: The bridging loan is short-term in nature. So you will need to prove your creditworthiness to convince the lender that you’re capable of repaying your loan.
- Have the required documentation: This may include your Option to Purchase (OTP) document, which proves that you have an exclusive right to purchase the property.
You will also require your credit score, proof of income, and outstanding bank loan statements. Your CPF withdrawal statements and property will also be needed to prove your payment capability.
- Look for a lender: You can choose a specialised broker, bank, or money lender. It pays to be aware of their fees and charges.
Normally the interest charges are about 5-6%, depending on the lender. This is because you need a large sum of money in a shorter period – a maximum tenure of six months –
compared to standard loans, which take a longer time.
- Have a back-up plan: Your bridging loan lender will be concerned with how you will repay the loan on or before its term.
You may also may find some lenders charging additional fees if the time agreed on to pay the loan lapses. Failure to have a back-up plan will likely add costs or see you looking for temporary accommodation.
With the above tips in mind, you now can decide where to get the bridging loan from.
Do I Get A Bridging Loan From A Bank, Money Lender, Or Loan Broker?
You can either approach any financial institution such as banks, loan brokers or money lenders.
While a bank is a reliable place to get a bridging loan, banks are more inclined to ask for your financial history and credit score.
If your credit score is not exactly great, this is one reason to look for alternatives such as money lenders.
With a licensed money lender, you can enjoy:
- More flexible payment terms
- Low-interest rates, not more than 4%
- You may not need any collateral
- You may not require a credit score
To get a licensed money lender, check the list of licensed money lenders in Singapore. Such lenders are equipped with the relevant laws and regulations of moneylending in Singapore.
Typically, most lenders are concerned with the value of your collateral and the exit strategy or back-up plan. These are the vital things that determine how much you can borrow.
How Much Can You Borrow With A Bridging Loan?
How much you can borrow depends on the value of your property and your personal finances.
You can get the loan up to your old property net sale proceeds. This will cover the remaining amount you need beyond the Loan-To-Value (LTV) amount you apply for.
The LTV ratio measures how the loan amount you can get for a house purchase.
For banks, the maximum LTV ratio for a loan is 75%.
While most bridging loans have a maximum loan amount of 20% of the property value that can be used as downpayment, you can use the sale of your existing property to cover the shortfall.
This is as long as there is enough from your old property’s sales proceeds.
There are other ways you can lower the LTV ratio so you end up owing less.
How To Use The Bridging Loan To Lower Your LTV Ratio
A bridge loan can be used to lower your LTV ratio.
You may be wondering: Why should you lower the LTV ratio? The reason is simple.
A higher LTV ratio means you are borrowing more money, which increases your risk of default.
This is when a bridging loan comes in handy. It can lower your LTV ratio by giving you the funds you need to make the downpayment. This lowers the loan amount, and as a result, your LTV ratio.
Here is an example: For instance, your new property cost is $1,000,000 and you have a loan quantum of 75% LTV or $750,000 to be covered by the loan.
The sale from your original property is expected to bring in $500,000. You can choose to take in a bridge loan of $200,000 as the non-cash downpayment and bring in $50,000 from other sources to top up the cash down payment.
It’s likely that you will have not received the $500,000 as the sales proceeds from the old property. With this, you have two options:
- You can take the 75% LTV and wait for the prepayment penalty period to end then repay a lump sum of $300,000.
- Increase your bridging loan amount to $500,000. You will only need to take $450,000. This will have lowered your LTV to 45%. Once you receive the sales proceeds from the old property, you will then clear your bridging loan.
The only drawback is that you will be subjected to higher interest rates due to the higher quantum of $500,000.
The key thing is that when it comes to bridging loans, there are too many options one can consider to meet their financial targets.
A diversity of options lessens your financial burden. One option would be to use your CPF.
Unsurprisingly, most Singaporeans use the CPF and any other remaining amount in cash to cover their HDB financing.
With this option, remember that you will still need the CPF savings for your retirement.
Therefore, using your CPF savings and cash helps you keep some money in your Ordinary Account (OA) for it to continue attracting interest. It’s vital to find a balance between the two.
Can You Use CPF To Cover The Bridging Loan?
It’s possible to use your CPF to pay off your bridging loan.
You can sell off your old property and receive the sales proceeds, then get a refund of your CPF savings. Then, you can use the savings to repay your bridging loan. But you will be forced to pay your interest in cash.
If you have borrowed from money lenders, they will mostly require you to pay the loan through cash or a bank transfer.
But you need to be sure of how much CPF you’re using to pay off your bridging loan. This is to avoid running out of cash unexpectedly.
With this, you can make the right decisions on your bridging loan in Singapore.
What To Know About A Bridging Loan
There are things to consider when bridging the gap between selling your old property and obtaining a new one. Here is what to know about your HDB financing:
- You will have to use your property as security: This applies to those who get bank loans for HDB. Unlike money lenders, a bank will have to take your property as collateral for the loan repayment.
In case of default, they only need to sell the asset. It’s hectic; you will have to pay for the property payment and the bridging loan.
- HBD valuation: When applying for a bridging loan, the lender may request a valuation report. You will pay the valuation fee depending on what is being valued.
The value will help you avoid overestimating what your property may fetch. Thus, you should look for a professional valuer who will not miscalculate your property value.
- Know the Singapore bridging loan interest rate and the terms of payment: A short-term loan needs prepayment within a short period of time. The interest is also high. As a borrower, you need to take what you can handle.
Know that you will have to show the lender that you’re capable of repaying such loans within the set time. Some may go the extra mile to perform a credit check to determine your capability for the loan repayment.
If you weigh out the above options and find that a bridging loan is not your thing, there are other alternatives you can choose from.
Alternatives To A Bridging Loan
- Secured loans: While secured loans will have to use your property as collateral, you will pay lower rates. The payment period is also spread over a longer period.
- Mortgages: Mortgages are issued for a longer time compared to bridging loans. Besides, they attract lower interest rates.
- Personal loans: If you feel that you’re an unqualified borrower in need, you can opt for a personal loan from a bank or licensed money lender.
However, this doesn’t mean that your credit score and sale of property among proof of ownership will not be considered by the bridging loan lender.
Bridging loans can assist Singaporeans to have a smooth financial transition process when selling an HDB property, condominium, or any other property.
When managed well, bridging loans can be a fast and flexible option, and help you solve immediate cash flow crises. However, they also have limitations.
If you need a bridging loan and are not sure of the process to take, speak to a BST Credit professional for guidance.