In today’s market, buying a new home has become achievable. We are not saying it is easy but “achievable.” This is because of the availability of a variety of financial products that can help you achieve your goal of owning your dream property.
Among these financial tools at the disposal of working-class Singaporeans is bridging loans. They are one of the types of loans offered by banks and licensed money lenders in the country that are geared toward helping individuals in property acquisition.
Why Bridging Loan Is Critical for Homebuyers
It is not always that one has the funds to buy a new property whenever available. In most cases, when people are looking to upgrade to a newer HDB flat, they first seek to sell the old property and use the net sales proceeds from the transaction towards acquiring the new building.
We all know that selling a property may sometimes take weeks and even months. So, what is one supposed to do if one wants to put up the down payment for the new property to secure it and not have the funds at hand? Well, this is where a bridging loan can help.
Is It a Good Idea?
A bridging loan is a great choice, especially for individuals looking for a quick and short term loan in Singapore to help them make the down payment for their new property. This will help them secure the agreement for that building and not miss out.
It can also be a good option for those who have the fund to cover the down payment but do not wish to do so with their own funds. This may be because one has other things planned for their current funds or does not want to use their savings for property acquisition.
Bridging Loan Explained
What Is a Bridging Loan?
Bridging loan is one of the short-term financial products geared toward helping citizens and permanent residents acquire new property. It is essential to note that it differs from the Temporary Bridging Loan Programme, which is mainly geared towards enabling enterprises to access working capital.
An HDB bridging loan can only cover the down payment, not the entire new property purchase price. In most cases, it can cover about 15% to 20% of the new property value as a down payment.
It can be a great help, especially if one does not have enough money to cover the down payment and secure the agreement for the new property.
Bridging loans are available from most major banking institutions and licensed money lenders in Singapore.
How Does It Work?
The bridging loan, once approved, will allow the borrower to make the down payment on the new property they want to purchase. In most cases, this is the second and larger down payment on the building, typically about 20% of the new property’s price.
Let us use the scenario below:
Assume you want to buy a new building whose purchase price is $1M.
| 1st Deposit (5% of property price) | $50,000 |
| 2nd Deposit (20% of the property price) | $200,000 |
| House loan to cover the remaining amount (75% LTV) | $750,000 |
Now that your old property is still on the market and is still for sale, you may not have the cash to cover both downpayments. In such a case, you will have to cover the first downpayment and then take a bridging loan of $200,000 to pay the second downpayment.
Types
In Singapore, there are mainly only two types of bridging loans. The distinction between these two types of bridging loans is how one will be required to make loan repayments.
The two types of bridging loans available are as explained below:
Capitalised Interest Bridging Loan
In most cases, one will take a bridging loan and a house loan that will cover the cost of the new property after the down payment.
Now, in the case of a capitalised interest bridging loan, you will not be required to start paying the bridging loan immediately. You will only start the repayment after the selling property is bought. However, you must pay the loan and accrued interest in a single lump sum.
This bridging loan is an excellent option for anyone who dislikes paying more than one loan. Banks and moneylenders offer it in Singapore.
Simultaneous Repayment Bridging Loan
In the same case as above, when you have a house loan and a bridging loan, you must make payments on both loans every month, hence the name “simultaneous repayment.”
With this loan, you will be required to start making the monthly payments for your bridging loan immediately, even though you are also paying for the other house loan.
Making two loan payments may be challenging for others, so a borrower should be careful when taking any loan to ensure they can afford it. This loan option is only available from banks since it is not applicable to money lenders.
Bridging Loan Features
|
|
Bank Bridging Loans |
Money Lender Bridging Loan |
|
Interest Rates |
4-6% pa |
1-4% pm |
|
Loan Amount |
Up to 1M or even more depending on the bank |
6 times your monthly income |
|
Loan Tenure |
6 months or until the property is sold |
1 month or until property sale is complete |
|
Collateral |
Required |
Not required |
|
Property Type |
HDB |
All property types |
Loan Purpose
The main difference between a bridging loan and others is that it provides short term financing to help you cover the down payment cost of acquiring a new property. The funds cannot be used for any other purposes except this.
Bridging Loan Interest Rates
The interest rates of bridging loans will vary from one lender to the next. In most cases, banks will offer lower rates than money lenders. The rates offered by money lenders are usually 1-4% per month.
Loan Tenure
Again, the loan tenures are dependent on the terms of the lender. Some banks will give the borrower up to six months, up to 1 year (in case they choose capitalised interest), or until the sale of their old property is completed.
On the other hand, money lenders can offer 1 month or until the sale of property is completed.
Loan Amount
Typically, banks offer a more significant amount than moneylenders, especially since they secure their loans with collateral. They can offer borrowers up to $1 million or more depending on the value of their property.
On the other hand, most moneylenders do not offer as much as a bank can give the borrower up 6 times their monthly income.
Collateral
Loans from banks will require the borrower to provide collateral. In most cases, the property will be the collateral that secures the loan. Moneylenders do not require any collateral.
Best Bridging Loans in Singapore
Getting a bridging loan is not that hard because most giant banks offer bridging loans in the country. In addition to banks, moneylenders are the next best option for anyone seeking bridging loan packages. Let us compare the best bridging loans in Singapore in the table below:
|
Interest Rates |
Loan Tenure |
Property Type |
|
|
DBS Bridging Loan |
Prime Rate |
6 months |
Any property |
|
Maybank HDB Home Loan |
1.4 – 1.6% per annum |
6 months |
HDB BTO flats and building |
|
OCBC Home Loan |
1.55% per annum |
6 months |
Any |
|
Standard Chartered HDB Bridging Loan |
SIBOR (3 months) and 2.00% per annum |
six months |
HDB flats |
|
UOB bridging Loan |
4-5% per annum |
6 months |
HDB flat |
|
Money Lenders Bridging Loan |
1-4% per month |
1 month or until the sales of property is completed |
Any |
Insights
Banks offer better rates than money lenders. However, it should be noted that they have much stricter requirements and require one to have a good credit rating. Furthermore, the loan will require the borrower to put up the property as collateral.
On the other hand, money lenders can be a good option for people that do not have good credit scores. They also have lenient requirements and only use your income to gauge your loan repayment possibility. In addition, money lenders process loans on the same day, quicker than banks, which can take weeks.
Factors to Consider Before Applying for a Bridging Loan
1. Loan Amount
The amount is one of the most important things to consider. For those looking for bigger loans, a bank might be more suitable than a money lender.
2. Loan Interest Rates
The interest rates will determine the number of interest payments you will make on top of the principal loan amount for your loan—the lower the interest, the lower the payment, and vice versa.
3. Monthly Repayments
You should factor in the monthly repayments you will be required to make for each loan before taking it. Ensure you choose a loan with a monthly payment you can comfortably afford; ideally, the repayments should be less than 30% of what you earn monthly.
4. Risk
The risk with bank loans is that your property might be auctioned if you default. Since moneylenders’ bridging loans are unsecured, there is no risk of property seizure and auction for money lender bridging loans.
5. Loan tenure
In most cases, the loan tenures vary from 1 month or until the property sale goes through for money lenders and up to 6 months for banks.
FAQs
1. What is the interest rate on bridging loans?
For banks, the rate is around 4-6% per annum, while for money lenders, it is 1-4% per month.
2. Can I get a bridging loan with a bad credit score?
Yes. However, you will have to apply for a bridging loan from a licensed money lender in Singapore, such as Raffles Credit.
Closing
A bridging loan is a great financial tool to give you short term financing to cover the down payment of your new property even when the previous one is yet to be sold. Here are a few pointers to take away:
- A bridging loan is a short term financing solution. The tenure is typically 1 month or until your sale of property is completed
- Many bridging loan packages are available from banks and money lenders in Singapore. Before applying for a loan, ensure you compare the available options to find the right fit for you.
- The loan usually has a higher interest rate than other house loans.
- You should have an Option to Purchase (OTP) when applying for a bridging loan.
We understand that finding the right money lender for a bridging loan can be a challenge. That is why we have strived to provide our clients with the best possible loan options to match their needs at Raffles Credit, a licensed money lender in Singapore. Contact us today to get a free quote! No commitment required.
