How A Bridging Loan Works And How To Apply For One
Do you want to sell your current property and upgrade to a new home in Singapore, but don’t have enough funds? You can try getting a bridging loan from a licensed money lender or bank.
However, before you approach any lender, you need to understand how bridging loan works. You should also know when to take out this type of loan, the interest rates, and the application process. Besides, which banks and money lenders offer bridging loans?
Keep reading this article to learn all about bridging loans in Singapore.
What Is A Bridging Loan?
It is a short-term loan that is used to cover the cost of buying a new home as you wait for the sales proceeds of your old home to come in. You can use the loan for the downpayment and other expenses .
Let’s say you have found your dream home, agreed on a price with the seller, and are about to sign the sales and purchase agreement.
However, you are still in the process of selling your current home. Hence, you do not have the money to make a downpayment for your new property.
This is where a bridging loan in Singapore comes in handy. You can approach a bank or money lender for money to “bridge” this financial gap. It is best to get the loan from the same source as your home loan.
The maximum bridging loan amount you can get depends on how much you have in your CPF Ordinary Account (OA) and the net proceeds you get from the sale of your old home. Lenders a maximum of six months to settle the debt. This is how bridging loan works.
How A Bridging Loan Can Lower Your LTV Ratio
An HDB bridging loan can help to lower your loan-to-value (LTV) ratio. It is crucial to have a low LTV ratio because the higher it is, the more you need to borrow more.
As a result, your chances of defaulting are higher and the chances of a lender approving your loan are lower.
Here is an example:
- Your new property costs $1,000,000
- You qualify for a loan quantum of $750,000 (75% LTV)
- You are selling your old property at $500,000
- You need $200,000 for a non-cash downpayment and $50,000 to top up
- You have not received the $500,000 payment after selling your old home.
You can take the $750,000 loan from the bank. Then you can take out a bridging loan worth $200,000 and get $50,000 from other sources to cover the downpayment.
After receiving your sales proceeds ($500,000) from your old property and repaying your bridging loan in Singapore ($200,000), you will remain with $300,000 at your disposal.
At this point, you can choose to lower your LTV ratio in two ways:
- Take out the $750,000 loan in full, wait for the prepayment penalty period to end, and repay $300,000.
- On the other hand, you can choose to borrow a bridging loan worth $500,000 instead of $200,000. In this case, you will only need to borrow a home loan of $450,000, which will lower your LTV to 45%. After receiving your sales proceeds, you can use them to clear the bridging loan.
When To Apply For A Bridging Loan
After understanding how bridging loan works, you need to know when to apply for it. This is because the main purpose of getting it is to upgrade from your old property.
Therefore, you can approach a money lender for a bridging loan when you want to move your family from a HDB flat to private property. You can also get a bridging loan when you want to buy a HDB flat.
Factors To Consider Before Applying For A Bridging Loan
Before you take out any loan from a bank or money lender in Singapore, there are considerations you should weigh first. If you want to borrow a bridging loan, think of the following:
Amount To Borrow
You can decide to borrow a HDB bridging loan if you don’t have enough to make the downpayment. Or you may choose to keep the cash you have on hand for emergency purposes and instead take a loan.
Both scenarios are okay. It’s up to you to weigh the pros and cons.
However, note that a bridging loan demands a high interest rate, making the repayment amount significant. Therefore, even if you qualify for up to 25% of your new home’s value, you can opt not to take the whole amount.
Instead, borrow only what you need to cover the downpayment plus other home transaction expenses.
Why You Want The Loan
People source bridging loans in Singapore to bridge the financial gap before they get sales proceeds from their previous property. But there are other reasons.
For example, you may need to sell your home as an en bloc sale, which requires you to get a new property quickly. In such a case, a bridging loan is a good idea. Also, en bloc sale homes are lucrative in Singapore.
On the other hand, if you are selling a recently renovated property, you could have lowered your cash reserve to cover the cost. As a result, you will need a bridging loan to purchase an upgraded home.
You can consider taking a home renovation loan instead of a bridging loan because the interest rates are lower.
Loan Terms And Conditions
You should also consider the loan terms and conditions to see if you can abide by them.
For example, a bridging loan is a short-term loan with a maximum repayment period of about six months. Its interest rate is also higher than that of a home loan.
Therefore, ask yourself if you will be able to settle the high interest within the given time.
Risk Of Borrowing
Imagine taking out a bridging loan in Singapore and finding out the sale of your old home fell through. How will you repay the loan now?
It can be a nightmare, but it will be easier to handle when you know the next step. Therefore, you can ask your lender what the penalties are if the sale doesn’t work out. Such terms vary for banks or licensed money lenders.
How To Apply For A Bridging Loan
Applying for a bridging loan in Singapore is simple when you work with licensed money lenders. The approval process is faster once you provide the required documents.
You can also opt to work with a bank. However, the approval process may be longer, and you will need to adhere to more stringent requirements than a legal money lender.
The first step in applying for a loan is finding a licensed money lender or a bank to work with. Depending on your financial ability, you can shop for the most favourable interest rates, loan terms, and repayment plans.
After you get your best lender, you will proceed to provide your details and the required documents. They include:
Your name, contact details, and email address are required. Also, the lender will need proof of your identity, such as your NRIC to prove you are the one taking out the loan.
You will also need to provide these documents to qualify for the loan:
- Option to Purchase (OTP): This document shows you have the exclusive right to buy the new property you want to move into.
- CPF withdrawal statement and outstanding bank loan statements: These determine your repayment capability if you are given the loan.
- Credit report: Banks need your credit report to check your credit score. If you have a bad rating, they are likely to reject your application.
After you provide the required details and documents, the lender will evaluate them to determine your eligibility.
Legal money lenders and banks in Singapore use various criteria when giving out a HDB bridging loan. However, every Singapore citizen, permanent resident, or foreigner who wants to sell their current home and purchase another can apply.
Most lenders will check your credit score, employment history, and income to determine your eligibility. Therefore, it is good to have a credit score of nearly 2,000.
Lastly, the lender will disburse the money if you meet the eligibility criteria. If you get the loan, ensure you adhere to the repayment agreement.
Failure to do so leads to additional costs or, worse, can see you searching for a temporary shelter since the bridging loan is secured with your property.
Fees And Charges
Every loan type comes with fees, and a bridging loan in Singapore is no exception. The amount depends on your lender.
You will be charged a late payment fee if you borrow from a bank and fail to pay the loan on time. The fee ranges from 3-5%, depending on the bank you are working with.
Even though banks give a grace period of 15 days, making your payments on time would be good as you will avoid lowering your credit score.
Lenders That Offer Bridging Loans
Finding a lender to give you a loan can be a hassle. You have to shop online and offline to find the best deal in the market.
So which lenders understand how bridging loan works and provide them to Singaporeans and foreigners in the country? You can work with:
Banks in Singapore offering home loans also provide the option of bridging loans. Getting your HDB bridging loan from the same bank providing your home loan is essential.
Here are some banks in Singapore to choose from:
- DBS Bank
- United Overseas Bank
- Standard Chartered Bank
Licensed Money Lenders
Legal money lenders are another option. According to the Ministry of Law, there are more than 100 licensed money lenders in the country. They are allowed to offer various types of loans, including bridging loans.
Why borrow your bridging loan from a legal money lender? They approve loan applications faster compared to banks. You can get a loan within minutes if you have the required documents. Besides, they are not strict regarding your credit score.
Legal money lenders are regulated by the Ministry of Law in Singapore. They are expected to follow the provided guidelines when giving loans to borrowers. For example, the government outlines the interest and fees they should not exceed.
Also, they must explain to the borrower all the terms and conditions in a language they understand before they sign the loan contract.
Therefore, if you do not meet the stringent bank requirements, approach a legal money lender for the loan. In case of any misconduct, such as insults or overcharging by the lender, you can report it to the Registry of Moneylenders.
BST Credit is an excellent example of a legal money lender where you can source a bridging loan in Singapore.
Decide If You Need A Bridging Loan
At one point in life, you will move from your current home to a new property, maybe because your family is growing bigger.
If you have yet to receive the sales proceeds of your old home, you will need to source finances to sort the downpayment of your new apartment. This is how bridging loan works to cover the financial gap.
You can take the loan from a bank or a licensed money lender. Both have various criteria when checking your application, depending on your credit score, employment history, income, and other considerations.
Besides, you must provide the required documents, such as the OTP and outstanding bank loan statements.
If you are looking for a bridging loan, get in touch with BST Credit. We are one of the best licensed money lenders in Singapore with great deals in the market.