Owning a house is every person’s dream. However, insufficient funds can make it hard to own a home. Luckily, one can apply for different types of loans to make this dream a reality. One can use the two popular types of loans when buying a house: home loans or bridging loans from any participating financial institution in Singapore. So which is better?
A home loan is also referred to as a mortgage, and it is a secured loan in which one takes a loan to buy a home while offering it as collateral. The best part about home loans is that lenders offer to cover about 90% of the cost of the property at a reasonable interest rate, with a long repayment tenure.
When buying a house, a downpayment is required, and if a buyer does not have any funds, they can apply for a standard bridging loan from a participating financial institution. The bridging loans include capitalized interest and simultaneous repayment bridging, which make it possible for property upgraders to purchase a rundown house, renovate it, and use the sale proceeds to repay the loan.
What is a Bridging Loan, and How Does It Work
A bridging loan is a type of loan that helps homeowners make their upfront fees or downpayment. It is also referred to as a swing loan that comes in handy for people who want to sell their home and buy a new property.
It is a short-term loan extended to buyers and can run from 6 to 12 months, depending on your agreement with the financial institution. And the interest rate ranges between 5% and 6%.
While the moneylenders extend a bridging loan up to 6 times your monthly salary with the repayment period ranging from one month until the property is sold, and the bridging loan interest rates range between 1% and 4% per month.
Types of Bridging Loans
Simultaneous
A simultaneous repayment bridging loan is one where a homeowner can borrow a loan based on their income or recent property sale. The borrower is given a set date to settle the loan plus interest or after the occurrence of a particular event. A simultaneous payment bridging loan can be quite a burden for the borrower.
Capitalised
A capitalised interest bridging loan covers the entire cost of buying a house, and the financial institution lending the funds starts charging interest after the borrower sells their previous property.
However, you are required to pay installments on your principal loan, and once the sale of your last property is confirmed, the lender imposes the interest.
When Should You Opt for a Bridging Loan?
Like every other type of loan, bridging loans have pros and cons. You can apply for a bridging loan if:
- You want to sell your current house and buy a new and bigger house.
- You can’t afford to make a down payment for a new house while waiting your current house to be sold
- Want to close on a new home, but haven’t receive sales proceeds from old house
- Pay off their existing mortgage and place a down payment on a new home
- You want to buy a home, but the seller is adamant against accepting a contingent against a condition of payment after you’ve sold your home.
Factors to Consider When Choosing a Bridging Loan
If you are looking to apply for a bridging loan to finance a new property while you wait to close on your old home, you can consider the following factors:
1. Loan Amount
The amount the moneylender is willing to give is usually up to six times your monthly salary. It’s tempting to apply for a higher loan, but it comes with a higher interest.
Since it’s a short-term loan, you’ll be required to pay within a short period.
2. Interest
When applying for any loan, the interest rate must be considered first. High-interest rates pose quite a challenge when repaying your loan and might make it harder to save any money. If you apply for a bridging loan with licensed moneylenders, you will be charged an interest rate capped at 1 – 4 % per month.
On the other hand, you’ll need a good credit score to apply with a participating financial institution for better rates.
3. Monthly Repayments
Banks will take your property as collateral, requiring you to create a schedule to make monthly payments. And failure to make payment will result in the loss of your property as the bank will auction it to get back their money.
Therefore, request a quote from the moneylender to learn more. If you have issues making payments, you can apply for a bridging loan from a moneylender as you don’t need any collateral.
4. Tenure
Bridge loans are short-term loans, so you should expect the maximum repayment period to be brief. Therefore before taking out, check your finances and sources of income and estimate whether you’ll be in a position to make repayments on time.
If you take a bridge loan from a bank, the repayment period ranges between one to six months. On the other hand, moneylenders offer a flexible repayment period, from one month until the property completion date. However, the longer you take to repay, the higher the interest rate.
5. Risks Associated with Secured Loans
Bridging loans is a high-risk loan as they are short-term, mainly if you apply via a bank—however, it’s not too risky for moneylenders as they do need any collateral.
Top 5 Bridging Loans in Singapore
Having a steady income from fixing and flipping houses is every property upgrader’s dream in Singapore. However, insufficient funds or delay in selling the current fixes often halt their progress. You can apply for bridging loans with DBS, UOB, Maybank, Standard Chartered, or licensed moneylenders.
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Eligibility Requirements Getting A Bridging Loan
For banks
- Above 21 years
- Singapore Citizen or Permanent Resident
- Good credit score
- OTP (option to purchase) document
- Outstanding bank loan statements
For moneylenders
- Over 21 years
- Singapore Citizen or Permanent Resident
- Steady source of income
- Proof of residence
- Option to purchase (OTP) document
FAQs
1. Does HDB Offer Bridging Loans?
No. HDB does not offer bridging loans, but borrowers can refinance their mortgages.
2. Can I Pay the Loan With CPF?
Yes. You can use CPF to pay your bridging loan. The best part is your CPF savings are refunded instantly once the sales proceed is completed.
3. Is There an Alternative to a Bridging Loan?
Personal loans: This is a type of loan you can get from a bank or moneylenders. With a steady monthly income, banks can offer up to 10 times with a bank and 6 times with a money lender.
HELOC: These are loans offered using your assets as collateral, and you can take as much as you need providing your assets are suitable for it. Find out more on the differences between HELOC and Bridging Loan.
Home equity loan: This is also referred to as a home loan mortgage issued against your property.
4. Is It Wise to Take a Bridging Loan?
Yes, if you have a steady flow of income and are sure of selling the property in the given timeline.
No, if you don’t have a steady flow of income and the real estate market is terrible, making it hard to sell the property within the given timeline.
5. Can I Get a Bridging Loan With No or Bad Credit?
You will have low chances of securing one with a bank and are assured of securing one with moneylenders as they do not need to check your creditworthiness, but you must have a steady source of income.
However, your credit score plays a crucial role in setting your interest rate.
6. What is the Temporary Bridging Loan Program?
Do not confuse bridging loans with the Singapore government’s Temporary Bridging Loan. The latter is used to help business owners fund their SMEs. The government-assisted financing scheme collaborates with financial institutions in extending bridging loans to business owners of up to 3 million dollars—the loan interest rate averages at 5.5% per year.
Summary
Bridging loans are essential for homebuyers looking to close on a home before selling their current home. The best bridging loan in Singapore is capitalised interest, as it does not impose a financial burden on the borrower. The best part is you can apply via a bank or a moneylender.
Key Takeaways
- Secured bridging loans are high risk as they can lead to the loss of your hard-earned money if you default on your payments.
- A bridge loan with licensed moneylenders is a great alternative for a person with a poor credit score but a steady income.
- Bridging loans are short-term loans with a repayment period of 1 to 6 months with a bank and a flexible period with a moneylender.
- With the real estate market fluctuations, selling a home can be quite a hassle, making it more challenging for property upgraders to continue to the next project.
The process of getting a bridging loan may be longer than you think. Good thing that Raffles Credit, a reliable licensed moneylender, offers a bridging loan with fast approval. Apply now and get your cash on the same day!
