How Long Does It Take To Get A Bridging Loan?
Some of us will live and own multiple homes during our lifetime. For instance, you might purchase a HDB BTO flat as your first home after getting married.
As your income grows and your family expands, you may opt to sell your HDB flat and move to a larger property in a few years. But in Singapore, selling a home isn’t always simple.
So licensed money lenders and banks offer bridging loans primarily to assist people in accessing the financing they need if they’ve sold their old property but don’t have the downpayment finances ready to fund their next property purchase.
This article will cover all the details of what is a bridging loan in Singapore, and how it works, and how long does it take to get a bridging loan.
What Is A Bridging Loan in Singapore?
A bridging loan, or bridge loan, is a type of home loan that offers you the funds you need to meet your urgent cashflow needs while you await the proceeds from the sale of your current home. It bridges the financing gap between your present and new home, hence its name.
In Singapore, a bridging loan is a six-month loan. It’s a temporary fix to help you move into your new home while you wait for the money from the sale of your current home and before you make a downpayment on your new one.
You can seal the deal on your new property quicker with a bridging loan than if you had applied for a conventional loan through banks and other lenders.
With a bridging loan, you can foot the downpayment, which could cover closing costs and ensure everything is in order when you move into your new home. It’s ideal for home buyers who have exhausted their financial options but need to relocate to a new home.
How Does A Bridging Loan Work?
Following the approval of your bridging loan, the bank will handle the financing needed to buy your new property. It will also assume your current mortgage.
You’ll need to make repayments monthly on your bridging loan, which will typically be interest-only, over six months.
If you take out a capitalised interest bridging loan, you will ultimately be paying off what is known as peak debt. It consists of the following:
- The loan balance on your current home
- The purchase price of your new home
- Legal fees
- Stamp duty
- Any capitalised interest payable till your existing home is sold
When your old home is sold, this peak debt is converted to end debt. From this point forward, your bridge loan is treated in the same manner as regular home loans.
How Long Does It Take To Get A Bridging Loan?
Various banks and lenders will have different policies on this. It also depends on where the loan application for a home is in the approval process.
A bridging loan can be obtained fairly quickly. All you need to do is ensure you meet the qualifying conditions and have the required documentation.
You can get approval as quickly as in one day. The funds are usually disbursed within three weeks.
Types Of Bridging Loans
The two main types of bridging loans available on the market are simultaneous payment bridging loans and capitalised interest bridging loans.
Capitalised Interest Bridging Loan
The bank will cover the entire cost of buying your new home as collateral for this bridge loan. Mortgage payments won’t begin until your old home has been sold. It is the best option if you don’t want to service two loans simultaneously.
Simultaneous Payment Bridging Loan
With this choice, you can simultaneously pay off your new home’s bridging loan and mortgage. You have a year to finalise selling your previous residence and begin loan repayment. It is undoubtedly the more tiresome of the two options.
What To Consider Before Getting A Bridging Loan
Homebuyers who cannot pay the downpayment on a new home until their current home is sold and the sale proceeds have cleared are the target audience for bridge loans.
If this describes you, you should consider the following issues before applying for a bridge loan:
What Additional Costs Will I Incur From Taking Out A Bridging Loan?
Bridging loans have the advantage of having a short term, despite having a high interest rate. As a result, you will pay relatively little interest overall.
However, it depends on the individual whether or not this sum is significant. The crucial step is to perform your calculations beforehand to ensure that you know the additional interest’s precise cost.
Don’t forget to look for any additional fees on top of the interest charges.
What Is Your Current Financial Situation?
The amount of cash on hand you have is always taken into account. In fact, it will be the most significant aspect.
Knowing where your finances stand will aid in making better financial decisions, particularly regarding the loan amount you are looking to apply for.
What Is The Loan’s Duration?
Depending on the bank you’re borrowing from, the loan tenure varies. Be mindful of the amount you borrow and the interest rates, as the short term can significantly increase monthly loan repayments.
What Is the Risk Level?
If you decide to proceed with applying for a bridging loan, you must be willing to accept a certain amount of risk. Bridging loans typically use your property as collateral.
In addition, you are taking out a sizeable loan before getting the money from selling your property. The interest rate is also higher than usual, and there is a very short window of time to repay the borrowed amount in full.
What Is The Backup Plan If The Sale Of The Old Property Falls Through?
This situation might be a nightmare. However, it’s always good to be ready.
Before taking out a bridging loan, ask your banker about the exit clauses in case the sale of your old property falls through for whatever reason.
How To Lower Your LTV Ratio Using A Bridging Loan
Your LTV ratio can be reduced with a bridge loan. As a result of taking out more debt, your risk of default rises with a higher LTV ratio.
In this case, a bridging loan may be beneficial. By providing you with the money for the downpayment, it can reduce your LTV ratio.
As a result, your LTV ratio decreases, along with the loan amount.
Let’s say you borrow $750,000 or a 75% LTV to pay $1,000,000 for a brand-new home. Sales of your old house are projected to total $500,000. Suppose you already put down the first 5% in cash and want to put down $200,000 in non-cash.
In this case, there are two choices for reducing your LTV ratio:
The first option is to borrow $750,000 for the new house.
After paying back the non-cash downpayment of $200,000, use the remaining $300,000 from what you got after selling your previous home as a lump sum. You will have to hold off until the prepayment penalty period expires.
The second option is to obtain a larger bridging loan.
Instead of borrowing $200,000, borrow the total $500,000 from the anticipated sale.
As a result, your mortgage will be less, $450,000, bringing the LTV down to 45%. You can pay off the bridging loan once you receive the sale proceeds and use the remaining $50,000 to settle your mortgage.
Pros And Cons Of A Bridging Loan
Before taking out a bridging loan, consider the benefits and drawbacks before revamping or downgrading your current home.
Flexible Payment Terms
Several bridging loan money lenders allow you to make principal and interest payments in that order.
A bridging loan with capitalised interest is also used to pay your mortgage before interest accrues. At the end of the bridging loan’s term, the interest is paid in full in one lump sum.
With funds available in 24 to 48 hours, bridging loans typically offer quicker approval times than other forms of short-term financing.
You can let your seller know you’re getting a bridging loan while you wait for the sale of your home to go through. By doing this, you persuade the seller you will complete the deal on schedule.
Generous Loan Amount
The maximum amount you can owe when using a bridging loan is higher. This is because it is secured against your home, which must be pledged as collateral.
Risk Of Short-Sell
You might need to increase your future property loan repayments if the price at which your old home sold fell short of the bridging loan.
But if you sell your property for more money, you might have to pay more in fees and interest because you might have gone over the loan’s term.
Charges And Fees
Bridging loans occasionally turn out to be expensive in terms of arrangement fees, exit fees, and other costs you might have to pay or repay.
High Rates Of Interest
Mortgage interest rates are valued on an annual basis despite being charged daily.
In contrast, the monthly interest rate on a bridge loan is variable. The HDB bridging loans’ interest rate may be higher than a mortgage, so be aware of this possibility.
How To Apply For A Bridging Loan
Although almost all banks in Singapore use the same guidelines and eligibility standards for bridging loans, some may have particular guidelines you must adhere to.
Banks typically require:
- Option to Purchase (OTP) document
- Most recent bank loan statements
- Your most recent Central Provident Fund (CPF) withdrawal statement
Another option is to apply for bridging loans from a registered money lender.
Using a licensed money lender rather than a conventional bank loan for HDB has several advantages.
For instance, you won’t need to put up your current home as security because the loan is unsecured. In addition, the processing time is quicker.
Carefully Consider If You Require A Bridging Loan
Singaporeans can sell a HDB property, a condominium, or any other property with the aid of bridging loans, which facilitate a smooth financial transition.
If properly managed, bridging loans can quickly and adaptably solve your urgent cashflow issues. Remember the fees and make sure they fit into your spending plan.