What happens if your current home no longer meets your needs?
While others may be content to live in the same property for years, others live in more than one property. For instance, if your family is growing, you may need to upgrade to a more spacious property from a simple one-room HDB flat. Another reason to buy a new home is when you need to relocate to an area near a school, office, or family member.
However, selling your old home and buying a new one can lead to financial challenges. This is where a bridging loan comes in. A bridging loan may be a good option if you want to purchase a new home before you receive the sales proceeds of your current home.
Read on to learn whether a bridging loan is good for you.
Bridging Loan: What Is It and How Does It Work?
A bridging loan is a short-term loan that will help you “bridge” the monetary gap when you’re selling your property and buying a new one. With this loan, you’ll have the money you need to pay for the downpayment of your next home purchase, even if you’re still waiting for your old home to sell.
How does it work?
Let’s assume that you’re selling your existing HDB flat for S$400,000 and you’re planning to purchase a new property worth S$1,000,000.
|Down payment (5% cash)||5% x S$1,000,000 = S$50,000|
(20% cash and/or CPF funds)
|20% x S$1,000,000 = S$200,000|
(Assuming you qualify for maximum 75% Loan-to-Value)
|75% x S$1,000,000 = S$750,000|
In this scenario, you have already paid the 5% initial down payment in cash. However, you don’t have enough funds to cover the next 20% down payment because your sales proceeds won’t be available until after 3 months.
You can take out a bridging loan to proceed with the property purchase.
Assuming that the bank offers a Loan-to-Value (LTV) ratio of 75% of the new property price, then you can borrow up to S$750,000. This is more than enough to cover the 20% down payment until you receive the sale proceeds.
Note that moneylenders have a more straightforward borrowing process. With a money lender in Singapore, you can borrow up to 6 times your monthly income.
Types of Bridging Loans
- Simultaneous Repayment Bridging Loan: With this type of bridging loan, you’ll need to simultaneously repay your home loan along with your bridging loan. This can be quite burdensome. Before you decide to opt for simultaneous repayment, note that you only have 6-12 months to sell your property and repay the loan.
- Capitalised Interest Bridging Loan: For this bridging loan, the entire amount of your new home is covered. The mortgage payment will commence once your old property is sold. This is a good option if you don’t want to pay two loans simultaneously.
Note: These types of bridging loans do not apply to licensed money lenders.
When Should You Opt for a Bridging Loan?
A bridging loan can help tide you over until you receive the sales proceeds from your old home. It provides you with the necessary funds to pay the down payment and other expenses to complete your property transaction.
Here are other reasons why you should opt for a bridging loan:
- Taking up a bridging loan with an interest capitalization feature provides you with financial assistance as you wait for the sale of your existing property.
- Borrow 100% of the purchase price of your new property. The loan repayments will be more affordable once your old property is sold.
- If your cash reserve is low due to renovating your existing property, a bridging loan can provide you with the funds you need.
- A bridging loan also makes sense if you’re buying at a property auction since it gives you sufficient funds to quickly complete the sale.
Total Cost of Taking a Bridging Loan
Bridging loans have higher interest rates than home loans. In fact, the average interest rate for bridging loans in Singapore is between 5% and 6% p.a. However, the tenure is short so the total amount of interest you’ll pay is relatively small.
To illustrate, let’s use our previous example wherein you’re purchasing a new property worth S$1,000,000. Additionally, you took up a bridging loan of S$200,000 to cover the remaining 20% down payment.
For this illustration, let’s assume that the bank charges a 6% interest rate and you have a 6-month tenure. The total interest you’ll incur is approximately S$6,000.
What Will Happen if the Sale Did Not Push Through?
This is the worst-case scenario. So before taking up a bridging loan, ask the bank officer or licensed money lender if they have “exit clauses” in case the sale of your old property doesn’t push through. Check the penalty fees involved.
Note that the terms and conditions will vary depending on the financial institution. So make sure to ask your loan provider and take these into account when making a decision
Factors To Consider When Choosing a Bridging Loan
- Loan Amount: Typically, a bridging loan can cover the non-cash portion of the downpayment of your new home – 20% in the case of most banks. If you’re borrowing from a licensed money lender, you can borrow up to 6x your monthly income.
- Interest: Private banks offer higher bridging loan interest rates than home loans. The average interest rate that banks charge is between 5% and 6% p.a. Money lenders, on the other hand, charge between 1% and 4% per month.
- Monthly Loan Repayments: If you’re taking up a bridging loan from a bank, then your monthly repayments will depend on the type of loan you chose. For instance, a simultaneous repayment option means you’ll pay off the bridging loan and your mortgage simultaneously.
However, a loan from a licensed money lender can be more flexible. You can request a quote to learn more about your options in terms of interest rates, tenure, and repayment schedule.
- Loan Tenure: Bridging loans are short-term loans, but the tenure may vary from bank to bank. Typically, you only have up to 6 months to repay the loan. With a money lender, the tenure is much shorter – typically up to one month or until the property’s completion date.
- Risks Associated with Secured Loans: A bridging loan from a private bank comes with risks since your property will be used as collateral. If you default on your loan, your property may be repossessed.
On the other hand, money lenders offer unsecured bridging loans. This means you’re not required to put your property as collateral.
Which Banks Offer Bridging Loans?
Most banks in Singapore that offer home loans also offer bridging loans as an option for their clients. The banking giants, such as DBS, Standard Chartered, and UOB have some of the best bridging loan packages in the market.
|DBS Bridging Loan||Standard Chartered’s HDB Bridging Loan||UOB HDB Home Loan|
|Interest rate||Prime rate||3-Months Sibor + 2% annual interest||4% to 5%|
|Tenure||Up to 6 months||Up to 6 months||Up to 6 months|
|Property type||All property types||HDB||HDB|
As you can see, the three banks offer a loan tenure of up to 6 months. However, they differ in interest rate charges and the property types in which you can use the bridging loans.
Additionally, you need to have these documents ready:
- Option to Purchase (OTP) document
- CPF withdrawal statements
- Outstanding bank loan statements
Consider these factors to make an informed financial decision.
Looking for an alternative to traditional banking loans?
Licensed Moneylenders Are a Viable Alternative
You may take up a loan with a licensed money lender in Singapore. Licensed lenders are registered with Singapore’s Ministry of Law.
With a licensed money lender, you can borrow up to 6x your monthly income, and the interest charges are capped at 4% per month, regardless of your income. Additionally, bridging loans with a licensed lender is an unsecured loan so no collateral is required.
Licensed money lenders have more lenient requirements. Most lenders do not require a credit score and they offer fast cash disbursal – typically within the same day. You can only get the cash in person.
Does HDB Offer Bridging Loan?
No, HDB does not offer bridge loans. However, you can apply for a second HDB housing loan after you sell your existing HDB flat. You can take up a bridging loan from any bank in Singapore or money lender as long as the Housing & Development Board (HDB) and/or bank allow it.
Can Use CPF To Pay Bridging Loan?
Yes, you can. However, this is only possible if the sale of your old property is completed and your CPF savings are refunded. Note that the interest must be paid with cash.
For licensed moneylenders, you must repay your bridging loan either by cash or bank transfer. You could also consider applying for a home equity line of credit (HELOC).
Can I Get a Bridging Loan With No or Bad Credit?
To qualify for a bridging loan with a bank, you need to meet their eligibility criteria. However, private banks in Singapore have stringent requirements. That said, you’ll have a lower chance of getting approved if you have no or bad credit.
Licensed money lenders, on the other hand, are more lenient. Although they’ll still check your credit score, they will also take into account your monthly income. Your credit score may affect your interest rate but it is not a deciding factor when approving a loan.
Selling your old property and buying a new one can feel like an exciting, fresh start. But it can also be overwhelming and financially challenging. Thankfully, you can opt for a bridging loan to complete your property transaction even before receiving the net sales proceeds of your old home.
- A bridging loan provides you with the funds you need to pay the downpayment of your next home purchase, even if you’re still waiting for your old home to sell.
- Bank bridging loans have higher interest rates than home loans – typically from 5% to 6% p.a. Licensed money lenders offer interest rates that range from 1% to 4% per month.
- DBS, Standard Chartered, and UOB have some of the best bridging loan packages in the market.
- Licensed money lenders have more lenient requirements and can offer you a bridging loan amount of up to 6x your monthly income.
Looking for the best loan packages with a trusted loan provider? 365 Credit Solutions is among the best legal moneylender in Singapore that offers hassle-free, fast, and affordable loan plans. Professional, efficient, and customer-oriented, you can be assured that you’re in good hands. Request a free quote today!