As we journey through life, many of us will change homes to meet our increasing needs. As your income grows and your family welcomes new members, you may decide to sell your current HDB BTO flat and upgrade to a more spacious HDB or private housing.
But you may find yourself in a situation where you don’t have adequate funds to purchase your new home as you are yet to receive the money from selling your old property. In such cases, you can apply for a bridging loan to help you bridge the monetary gap and transit smoothly into buying your new home.
This article will discuss bridging loans, the benefits and risks of bridging loans, how much you can borrow, and how you can apply for a bridging loan in Singapore.
Keep reading to know more about the things you should consider before applying for a bridging loan. We will also look at the best banks offering bridging loans in Singapore.
So, let’s start!
Suppose you are planning to purchase a new home and want to use the funds generated from selling your old flat. However, even after selling, you don’t have enough funds to purchase a new property immediately.
While you are waiting for the sale proceeds, the time for paying your new property’s downpayment is ticking and leaving you in a distressing situation. This is where a bridging loan comes in handy.
A bridging loan is a short-term loan that “bridges” the financing gap between selling your old property and securing a new one. This type of loan enables you to clear necessary payments for your new and/or existing property.
Many banks in Singapore offer such types of loans for buying both HDB and private property. You can use the loan for the downpayment and other initial expenses before selling your old property.
It is best to seek the loan from the same source (bank) as your home loan. Note that a bridging loan is only for people with a property to sell and buy and must be taken with a new home loan.
Let’s understand how bridging loans work with the help of an example.
Suppose you own a 4-bedroom HDB flat with an estimated cost of $500,000. You now want to sell it and buy a 2-bedroom condo worth $1 million. You have advanced to signing the Sales & Purchase agreement and have already paid the 5% down payment (5% of $1,000,000 = $50,000) in cash.
But you don’t have the funds to pay for the downpayment (20% of $1,000,000 = $200,000) as you have still not received the sale proceeds from your old home.
Unless you happen to have $200,000 at your disposal, you will need a bridging loan to help you bridge this hefty 20% payment and complete the purchase.
Bridging loans can help you pay for your new home and other related expenses while building up equity in your property. This is why bridging loans make an attractive option for first-time buyers. Be sure to compare different loan offers from different lenders to find the best deal for your financial needs.
If you are caught up in a property transaction and need quick access to cash, a bridging loan can be a good option that provides lots of flexibility. The key benefit is that no money is taken out of your pocket.
Unlike a standard home loan or other short-term financing options, bridging loans offer faster approval times. If you are buying at a property auction and have a much shorter time to complete the sale, a bridging loan could prove to be a good idea.
A bridging loan can be a risky choice, and you must be aware of the risks before opting for this kind of short-term borrowing. If you are not careful dealing with a bridging loan, it is easy to fall into debt traps.
Imagine taking out a bridging loan and later finding out the sale of your old home went awry. If it is sold below your planned value, then how do you plan to repay the high-interest loan? Ask yourself if the selling does not go as planned, are you prepared to pay a larger repayment with the accrued interest?
One of the downsides of a bridging loan is its secured nature of borrowing. You will need to put up an asset against the loan, which you risk losing in case you can’t pay it off.
If you fail to repay your loan, your lender can initiate bankruptcy procedures. It can taint your credit history and significantly affect your chances of getting a loan in the future.
It’s always easier to handle the situation when you are prepared for the worst and know the next step!
The amount you can borrow for a bridging loan will depend on your income and the loan-to-value (LTV) ratio. A bridging loan covers the balance amount you need beyond the LTV limit.
It means you can borrow up to 95% of the new property’s purchase price as long as the sales proceeds of your existing property will be able to fully repay the bridging loan within the tenure period of a bridging loan.
Let’s say you have decided to upgrade to a new launch condo priced at $1 million. You qualify for a 75% Loan To Value (LTV), which means you can get a home loan of $750,000 from the bank.
In this case, you can take a bridging loan of $200,000 to cover the non-cash downpayment (20%) for this transaction and add in $50,000 of your own funds for the cash downpayment (5%).
If the net sales proceeds from your previous property are $500,000, you will still have an excess of $300,000 left over after repaying the bridging loan.
Now you have two options:
While bridging loans can be an excellent short-term loan option, you should be aware they can be much more expensive than a traditional mortgage. You are likely to pay a higher interest rate and may have to pay additional fees with bridge loans.
Consider the aspects like loan tenure, interest rates and fees while choosing a bridging loan, as they can put a large dent in your finances.
Yes, you can use your CPF savings to pay for a bridging loan. You can later refund your CPF account once you receive the proceeds from the sale of your old property. But remember that you will have to pay the interest for the bridging loan in cash.
Since a bridging loan is a flexible short-term loan, banks or financial institutions do not charge any exit fees if you repay it early. Note that the sooner you pay, the more you can save on interest payments.
Taking out any loan from a bank should be a conscious decision only after weighing all the pros and cons of a bridge loan. Before applying for a bridging loan, try to answer the following questions:
Why am I considering getting a bridging loan? Are you looking to upgrade your property? Is your property being sold as part of an en bloc sale? Or are you selling a newly renovated property which has somewhat depleted your cash reserves? Dive deeper into the reasons why you need a bridging loan.
Why do I want to preserve my cash on hand? You might have decided to take a bridging loan for not having enough cash to service the downpayment, or you might want to preserve your liquid cash for emergency use. It is suggested to use your CPF balance to make the downpayment rather than taking a bridging loan due to the lower interest rates of the former. Note that preserving your cash reserves comes with higher interest costs of the bridging loan.
Can I manage the costs incurred from this bridging loan? Although the total interest payable for a bridging loan is relatively less, its value may vary from person to person. Make sure you do all your additional interest cost calculations and look out for any miscellaneous fees that can make your bridging loan more expensive.
What if something goes wrong with the sale of my old house? Before signing the dotted line, learn about the “exit clauses” and potential penalties from the loan provider if the sale fails to go through. Being prepared for the worst is the best you can do for yourself. Make sure you read and understand the terms & conditions of the different banks when making a decision.
Here are a few important pointers you should keep in mind:
A bridging loan demands a high interest rate compared to a standard bank loan, suggesting a lot of risk for borrowers jumping onto this short-term borrowing without considering all its aspects. Although it varies from bank to bank, generally, the interest rate ranges from 5% to 6% per annum.
In Singapore, you are mandated to repay the entire bridging loan amount within six months. Take the time to sit down, crunch the numbers and ask yourself if it is feasible for you to settle the loan amount within the given time.
Don’t expect your bank to pay for the full price of your new home. Considering the higher interest rate and short loan tenure, it makes the most financial sense to borrow only up to 20% of your new property’s purchase price, which can cover the downpayment and other transaction expenses.
When borrowed from a bank, the loan principal amount is only a part of the total cost. You must also consider the interest repayments, administrative/processing fees, late fees or penalties (possible) and other due diligence.
Here is another thing you must take note of. With a bridging loan, remember that your lender will use your property as collateral. This means you must rethink your ability to repay the loan on time since you are at risk of losing your property if you are unable to repay your loan.
The first step in applying for a bridging loan in Singapore is finding a bank or licensed lender to work with. Both types of lenders will thoroughly assess your capability to repay the loan on time for approval.
If you have a good credit history, your application will most likely be approved if you meet your lender’s eligibility criteria and other requirements.
Singapore Citizens and Permanent Residents (above 21 years of age) in the process of selling their property in Singapore can apply for a bridging loan. The applicant must have proof of the sale of the existing property.
Some banks offering home loans in Singapore also provide the option of bridging loans. They include:
|Bridging Loan||Type of Property||Interest Rate||Tenure|
|Maybank HDB Home Loan||All property types||5.25%||Up to 6 months|
|DBS Bridging Loan||All property types||Prime Rate: 4.25% p.a.||Up to 6 months|
|Standard Chartered’s HDB Bridging Loan||All property types||3 months SIBOR plus 2% annual interest||Up to 6 months|
|UOB’s Bridging Home Loan||All property types||4% to 5%||Up to 6 months|
A bridging loan can be a viable solution if you like to cover a shortfall when buying a new home in Singapore. People who are planning to upgrade or downgrade their current home (HDB or private property) can take a bridging loan.
If your application for a bridging loan is denied, there are other alternatives: personal loans and government temporary loan schemes.
Before signing the dotted line, research your property’s valuation so you don’t end up paying too much or getting stuck with a bad loan deal.
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