Owning a real estate property is one of the most lucrative investments in Singapore. Not only is it a safe long-term investment, but it is also an essential move for growing families. With this, many seek to make property upgrades or buy their second properties whenever they find the opportunity to do so.
Still, purchasing a new property is always a big and expensive financial decision, especially if you have not saved enough. Yet, there are many available financial options to help achieve this goal. One is through a bridging loan which can help cover the costs of your new home while awaiting funds to be available.
Like other home loans, bridge loans may come with unique benefits, risks, and higher interests. So, before making that big leap, find out how a bridging loan works and everything you need to know through this short guide.
What is a Bridging Loan?
A bridging loan is a short-term loan used to bridge the gap between selling your old home and buying a new one. It is helpful in transitional periods where you’ll need cash to finance the new purchase. Typically, these loans last a short period, between three to six months.
Below are its common features:
|Banks Bridging Loan Feature
|Net proceeds minus the CPF balances
|Three to six months (some lenders may offer up to a year)
|Interest Rate Terms
|3% to 11% (depending on the lender)
Licensed moneylenders are also a great alternative as they offer up to 6x your monthly salary, 1-4% interest rates and may be paid until the property’s completion date. Plus, the disbursement of cash is much faster, typically on the same day you submitted all the requirements.
How Does a Bridging Loan Work?
A common real estate scenario is wanting to buy a new house before selling your existing home. Often, purchasing a new home will also involve a 20% down payment, which can be challenging for many. Bridging loans comes in handy during these situations.
Bridging finance gives you access to immediate cash flow to meet short-term obligations. Thus, “bridging the gap” between your old home’s sales and your new property purchase.
However, being a secured loan, you will use your home property as collateral. You need to pay the loan within the agreed tenure, whether or not you have sold your property. Otherwise, you may lose your hard-earned property.
Bridge loans also come with higher interests and additional fees. All of which makes it by no means a risk-free option.
To understand better how it works, look at this bridging loan scenario:
You are an HDB flat owner upgrading to the new condominium property. While you have already closed the sales deal of your HDB, you are yet to receive the sales proceeds in about five months. If you don’t have enough cash to pay for the required 20% down payments, you can apply for a bridging loan to cover this amount.
|Price of HDB flat (old property)
|Price of new condo property
|5% down payment (cash)
|20% down payment
|S$200,000 (will be covered by the bridging loan)
Types of Bridging Loans in Singapore
Two types of bridging loans that banks may offer are the capitalised interest and simultaneous repayment bridging loans.
For the capitalised interest bridging loan, the bank will pay the entire purchase cost for the new house. Once the old house is sold, you will start paying the mortgage on the new one. On the other hand, the simultaneous repayment bridging loan allows you to hold two loans and pay both the home loan and bridging loan in tandem.
Note, however, that these types are only offered by banks and not by moneylenders.
Pros and Cons
Bridge loans can create peace of mind in difficult financial situations such as making an immediate home purchase. Still, you should be fully aware of its benefits and drawbacks. Let’s take a look at some:
- Fast arrangement and approval
- Bridge loans have flexible lending criteria
- Used for making large-sum payments
- Involves higher interest rates and other fees
- Larger monthly repayments due to being short-term
- High risk of losing the property if future payments fall through
When Does a Bridging Loan Make Sense?
Bridging loans are a fast way to get money in the short term. Still, we can’t stress enough that it is a risky option, especially if finances get out of hand. Say you cannot sell your property within the bridge loan quantum. Thus, a bridging loan requires careful review and makes the most sense for time-sensitive transactions like the ones listed below.
- Buying a property while waiting for the sales proceeds of an existing property
- Buying a second property
- Preventing a property from being foreclosed.
- Taking advantage of buying a property at an auction or a bargain price
- Being in the business of property restoration
Best Bridging Loans in Singapore 2022
Most often, banks offer bridging loan packages to homebuyers who do not have the cash to pay for a property’s initial down payment costs. The loanable amount is often a percentage of the new property value or purchase price and varies between lenders.
Below are some of the top loan offers:
|Type of Property
|DBS Bridging Loan
|All property types
|Up to 6 months
|Standard Chartered’s HDB Bridging Loan
|3 months SIBOR plus 2% annual interest
|Up to 6 months
|UOB’s HDB Home Loan
|4% to 5%
|Up to 6 months
|Maybank HDB Home Loan
|1.33% to 1.60%
|1 to 4 years
From the above options, the bank that offers the best loan is Maybank as it offers the lowest interest charges and the longest loan tenure. However, you may choose a bank that best fits your current situation and needs.
Moneylenders are also a great alternative as they offer 1-4% interest rates and may be paid until the property’s completion date.
Alternatives to Bridging Loans
Bridging loans are best for situations where time is of the essence. Yet, there could be other options that are also worth considering. So, before taking out a bridging loan, make sure to review other available options. Depending on your current needs, some options might suit you well and cost you less.
One alternative to consider is a home equity line of credit (HELOC). Like a bridge loan, a HELOC is a secured loan where you can borrow against your property’s equity. But with a HELOC, you will have a longer time to make repayments, reducing the risk of defaulting and losing your property.
An unsecured personal loan may be helpful if you don’t need much to cover the down payment. This loan may also be less risky as your property is not secured against your loan, and you may have a longer loan repayment time. Some banks offer flexible tenure up to five years, while moneylenders offer up to twelve months.
Bridging Loan from Licensed Moneylenders
Many licensed moneylenders in Singapore also offer bridging loans. Aside from the less stringent requirements, they offer high bridging loan amounts of up to six times your monthly income.
You can also take advantage of fast approval rates and competitive interests between 1% to 4% only. Bridge loans from moneylenders are also often more flexible in terms of amount and monthly repayments.
To qualify for a bridging loan from licensed moneylenders, a borrower should:
- Be at least 21 years old
- Has a minimum monthly income of S$1,500
- Have exercised their Option to Purchase (OTP)
- Proof of Income
- Proof of Residence
- Copy of exercised OTP
Requirements may vary between lenders and it is best to visit the moneylender’s website for specific requirements needed.
Bridging Loans Considerations
A bridging loan, either from a bank or a licensed moneylender, is an excellent option to have fast cash. It could ease the transition from selling your existing home to buying a new one.
Some banks may offer up to 80% of your property’s equity while moneylender can offer up to six times your monthly salary. Consider an amount where you can handle the monthly loan repayments.
Being a short-term loan, bridge loans often come with high interests. Choose a bank or a moneylender that offers lower interest rates to save on costs.
Missing out on a monthly repayment may accrue more interest and may be harder to keep up. Make sure to pay your monthly dues diligently to avoid losing your property or piling up on debt.
If you are unsure of the exact period of receiving the sales proceeds of your old home, choose a lender with a more extended tenure offer. A more flexible repayment period will reduce the risk of missing or defaulting on monthly repayments.
Bridging loans are essential when facing tight deadlines in real estate purchases, but it is not suited for everyone. It is best to consult a financial advisor and real-estate experts to make sure you are making the right decision.
- Consider all options before deciding whether a bridge loan is best for you.
- Always weigh the pros and cons before jumping into any short-term or secured loans.
- A bridging loan from moneylenders is an excellent alternative for those with low credit scores or short credit history records.
365 Credit Solutions, a reliable and trusted moneylender in Singapore, offers a bridging loan up to 6x your monthly salary with a repayment period up to your property’s completion date. Visit our office today or fill up a quick form to get your free loan quote.