Have you ever been in a situation where you have an ongoing home loan application but you have not received the amount from the bank yet and you badly need cash for your day-to-day expenses?
If you ever happen to find yourself in this scenario, keep in mind that there is a type of loan that can help you. It is called a bridging loan.
What is a bridging loan?
Also called a bridge loan, a bridging loan is a short-term loan used until a loan applicant gets permanent financing or ends an existing obligation. Having this type of loan allows people to meet their current financial obligations and acquire cash flow immediately.
Bridging loans are usually up to one year, have high interest rates, and are often backed by collateral like real estate. One common use of this loan is when people are waiting for their current home to sell but are already in need to make a downpayment for the new home they are buying.
| Maximum amount | The loan amount is limited by the net proceeds and CPF balances from the approved sales of the applicant’s old property. |
| Tenure | Must be settled within 6 months |
| Interest rates | May vary depending on the bank. Often ranging from 5% to 6% p.a. |
How do bridging loans work?
| Purchasing a S$500,000 property | |
| Down payment (5% cash) | 5% x S$500,000 = S$25,000 |
| Down payment (20% cash and/or CPF funds) | 20% x S$500,000 = S$100,000 |
| Loan amount | 75% x S$500,000 = S$375,000 |
Let’s assume that you are buying a property priced at S$500,000. In this case, you have already paid the 5% down payment in cash which amounts to S$25,000. You still have to pay an additional 20% down payment amounting S$100,000. But, you can’t provide this because your loan is not yet approved.
Assuming that the bank you chose offers a loan-to-value (LTV) ratio of 75% of the property price, you can borrow as much as S$375,000. This is more than enough to cover the S$1000,000 down payment you have to pay. This means that this loan can give you enough cash to settle your obligations and acquire a property quickly.
Pros and cons of bridging loans
Bridging loans can surely save us from our financial burdens, but it is essential to recognize this is a risky loan compared to personal loans and other types of loan. With this, you must be extra cautious when thinking about applying for this loan.
Here is a list of the positive and negative sides of bridging loans.
Pros
- The application process is within 14 days. Hence, you can get the money you need immediately.
- In bridging loans, you usually do not have monthly repayments to do. This means that you can use the money you borrowed to make some big purchases or raise capital where the money flow is difficult. Alternatively, you have your assets to repay the loan.
- The bridging market is quite competitive. This forces financial institutions to reduce interest rates. In some cases, you can even see banks offer bridging loans with as little as 0.37% interest rate per month. That is considerably cheap compared to other loans in the market today.
- Also, if you choose to buy a property undervalue, you can borrow the full property value. It means that you can actually buy a property without a deposit.
- In some cases, you can even apply for a bridging loan to purchase properties that are otherwise ineligible for other types of loans. For example, using this type of loan, you can buy an old property or an old house which is something that you cannot do in many home loans.
Cons
- Not everyone can get a bridging loan. To be qualified, the equity of your current home must be high.
- Given that bridging loans are short term, loan applicants might find it difficult to complete repayments in a short period of time. Paying half a million Singaporean dollars a year is not an easy task.
- Compared to a traditional mortgage, bridging loans are more expensive. Although the rates continue to drop, a traditional mortgage remains to be the most economical option for buying all property types.
- Aside from the interest rate, you also have to think about paying the application fee and other charge fees. These other expenses may be too much for individuals who are on a tight budget.
- Taking a bridging loan is essentially taking a second loan. It means that you have to pay two loans at the same time. This pressure to raise monthly repayments is simply unbearable for many Singaporeans.
Factors to Consider When Choosing a Bridging Loan
What should you look for when applying for a bridging loan? These are the top factors that you should be paying attention to. Please take note that banks have various deals, so you must examine these factors first before signing up for their offers.
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Loan amount
Typically, a bridging loan only finances up to 25% of the purchase price of your new home and not the entire amount. Considering the high-interest rate and the short loan tenure, you must only borrow the amount you need. Try not to borrow money more than that.
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Interest rate
Most bridging loans have higher interest rates than typical home loans. Usually, they range from 5% to 6% p.a. But, don’t worry because there are banks that allow you to settle the interest first and then settle the bridging loan upon collecting the sale proceeds of your old home.
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Monthly repayments
Before applying for this loan, take time and compute if you can pay the repayments that come monthly. Ask yourself if you have enough savings if in case you encounter an emergency along the way. Remember that aside from the repayments, you also have to pay for the mortgage of your new property. These monthly loan obligations can be burdensome for some.
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Loan tenure
As mentioned above, a bridging loan is a short term loan which means that you are usually only given 6 months to repay your debt. You can find a bank that offers a longer repayment period. Still, you have to be prepared to settle both the principal amount and the interest rates in that short span of time.
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Riskiness
Most bridging loans require collateral. This means that failure to repay your debt might cause you to lose property. Not to mention, you will not be able to acquire your new house. It would be best if you considered all these possible scenarios when taking a bridging loan.
Top Bridging Loan Packages Being Offered by Popular Financial Institutions
Remember that you will have to apply for a bridging loan to a bank different from the one that granted your home loan. To give you an idea of what is available in the market, here is a comparison of bridging loan packages offered by some banks in Singapore.
| Interest rate | Tenure | Property type | |
| DBS Bridging Loan | Prime rate | Up to 6 months | All property types |
| Standard Chartered HDB bridging Loan | 3M Sibor + 2% p.a. | Up to 6 months | HDB flat/property |
| UOB HDB Bridging Loan | 4% – 5% | Up to 6 months | HDB flat/property |
| 365 Credit Solutions Bridging Loan | 4% per month | 1 month or up until the property’s completion date | All property types |
The fourth option in the table is a 365 Credit Solutions which is a licensed moneylender. You can see how the rates of moneylenders can compete with the financial products offered by banks.
Frequently Asked Questions
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How quickly can you get a bridging loan?
Usually, the application process can take up to two weeks. But, do not worry because you can find financial institutions that approve applications after 72 hours or licensed moneylenders that approve in less than an hour.
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Is it a good idea to get a bridging loan?
It depends. While a bridging loan has helped a lot of people own a new property, it has its own risks. It is best to assess your financial capabilities first before deciding to apply for one.
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How can you get the best deal?
Check out as many lenders as you can. Do not rely on traditional financial institutions. You can find great deals from legitimate and licensed moneylenders too.
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How many types of bridging loans are available today?
Each bank has its own type of bridging loan, but to give you an idea, there are two main types of bridging loans. They are:
a. Capitalised interest bridging loan- a bank finances the entire amount of your new property
b. Simultaneous repayment bridging loan – you have to make two payments simultaneously for your new property
Takeaways
- A bridging loan is a good option for individuals and families in need of additional cash to purchase a property or other assets.
- Aside from the Temporary Bridging Loan Programme offered by Enterprise Singapore, banks and licensed moneylenders offer bridging loans that help Singaporeans on their next property purchase.
- A bridging loan has a higher interest rate and shorter loan tenure, which for some people can be challenging to settle.
Now that you have an idea of what a bridging loan is, you have to expand your options when thinking of applying for one. Aside from the government and banks, licensed moneylenders in Singapore can offer great deals.
365 Credit Solutions bridging loan is a fast and easy application with reasonable rates. Also, 365 Credit Solutions has consistently satisfied its customers, as proven by its high ratings on Google Reviews. You can make sure that the information you share during the application process is safe and secured.
