A bridging loan can be helpful to any second-time home buyers looking to acquire a new property while waiting for the sales proceeds from their old property to be completed. In such cases, they might need cash to make a down payment for their new acquisition but do not have the cash in hand since they rely on sales proceeds from selling their property on the market.
Getting a bridging loan can help these buyers to transition from selling the old property to owning the new one.
However, bridging loans are not accessible to people who want to use them for anything other than the above-stated scenario. In these cases, people must look for other types of loans as viable options.
Bridging Loans: What Are They and How Do They Work?
What Is a Bridging Loan?
As the name illustrates, this is a short-term loan given to the borrower to make a down payment for acquiring a new property. It provides transition funds that they can use as they wait for the property they already have on the market to sell and proceeds from that sale available to them.
How Does It Work?
If you already have a property that you are selling and is listed on the market but are looking to acquire a new one, an HDB bridging loan can help you fund any shortfall you may have when paying the down payment for your new property.
The borrower can use the loan to pay the down payment as they wait for the sale of their listed property to clear or for CPF funds to be refunded after completion of the sale. By meeting the down payment obligations, the borrower can secure the property.
Since banks and licensed money lenders provide these loans, some parameters may vary slightly. For example, money lenders tend to have a straightforward and quicker borrowing process than banks. On the other hand, money lenders offer a loan amount of up to 6 times the borrower’s monthly income, while banks might offer more significant amounts.
Types of Bridging Loans
There are only two bridging types: simultaneous repayment bridging loans and capitalised interest bridging loan. Let’s briefly look at each type below:
1. Simultaneous Repayment Bridging Loan
This type of bridging loan will require the borrower to make payments for their bridging loan concurrently with the new home loan; hence the name ‘simultaneous repayment bridging loan. Both banks and moneylenders provide this type of loan.
2. Capitalised Interest Bridging Loan
This type of loan is only provided by banks and financial institutions and not moneylenders. The borrower is expected to meet their loan repayment obligation once they sell the previously listed old property.
The financial institution covers the entire amount of the new home one is looking to acquire. The borrower is expected to repay the principal loan amount and the interest rates accrued during their loan tenure.
When to Take a Bridging Loan
Bridging loans in Singapore can be used by those looking to upgrade from an HDB property to a new property. The loan is available not only for HDB property but also for private property buyers.
In essence, the loan can be used by anyone looking to own new property while the previous property they held is not yet sold. It provides the cash injection needed to make the down payment for the new property purchase.
Total Cost of Taking a Bridging Loan
Let us look at an example scenario to highlight both how the bridging loan works and what the costs are:
Let us say you are looking to buy a new property worth $1 million, and the net sales proceeds expected from selling an old property is $500,000. If the maximum loan you can get is 75% LTV (of the new property), this translates to $750,000. If the seller wants cash down payment of $50,000 and a non-cash down payment of $200,000, you can take a bridging loan with a loan quantum of $200,000 to cover the second non-cash down payment.
When the sale of your old property is completed, and you get the $500,000, you can then make a lump sum repayment of your bridging loan plus interest accrued with those funds.
What If the Sale of My Old Property Did Not Go Through?
Various scenarios can occur depending on your lending institution and the terms and conditions of the exit clause as stipulated on the loan contract you signed. It is, therefore, crucial that you go through all the terms and understand any succeeding consequences that might follow in case your sale does not go through to be able to make an informed decision.
Factors to Consider Before Taking a Bridging Loan
There are various important factors to consider before you sign any bridging loan contract with any provider, be it a bank or licensed moneylender. Here are the main ones:
1. Loan Amount
This is perhaps one of the most important factors to consider. It is advisable that you take a loan amount that you know can be covered by the sale proceeds after selling your old property. Take the lowest amount possible to achieve this goal since the loan will come with higher interest rates than the house loan, and thus a higher amount will lead to a higher payment in accrued interest.
While moneylenders can offer up to 6 times the borrower’s monthly income, banks may offer more.
2. Interest
The interest rates may vary from one lender to the next. For example, licensed money lenders in Singapore will offer interest rates between 1% to 4% per month. Banks may offer different interest rates. Therefore, it is important to research to ensure you get the best rates for your loan to reduce the cost of financing the loan.
Moneylenders have higher interest rates than banks because their bridging loans are unsecured. This means they have a higher financial risk warranting an increase in interest; however, the difference is not significant.
3. Monthly Repayments
Monthly payments depend on the bridging loan you take and the amount. For example, there are no monthly repayments for capitalised bridging loans (only offered by banks) but rather a lump sum payment after your sale clears.
The tenure is one month or until when the sale of your old property is completed.
4. Tenure
The loan tenure is usually one month or until the sale of your old property goes through.
5. Risks Associated with Secured Loans
Taking a bridging loan from a licensed moneylender is not as risky as taking one from a bank. This is because bank bridging loans require security while those from moneylenders do not.
Which Banks Offer Bridging Loans?
Bridging loan packages are available to all customers of significant banking institutions in Singapore like DBS, Standard Chartered, UOB, Maybank, and others. In addition to this, licensed moneylenders offer these loans as well.
The main differences between bridging loans offered by banks and licensed money lenders are evident in the different parameters offered.
For example, while getting a loan from a bank might be tricky if you have bad credit, getting one from a moneylender can be easy. While moneylenders look at your credit score, it is mainly used to determine your interest and not whether or not you will get a loan (which depends on your income and ability to pay).
Also, moneylenders approve loans the same day and do not require collateral, while banks insist on the borrower providing security. The application and approval process might take weeks.
Additionally, applications for moneylender loans will require the borrower to submit the required documents and information at the office location, and funds are given in cash at the office. On the other hand, banks will disburse the fund online (through a wire transfer), which might mean the borrower will have to incur processing fees.
FAQs
1. Does HDB offer a bridging loan?
No. HDB does not offer bridging loans, but one can apply from any participating financial institution and licensed moneylenders. The terms and conditions are also subject to specific lenders.
2. How are bridging loans calculated?
For most banks, the bridging loan will be 20% of the value of the new property, as this is a standard down payment in the industry. Therefore, if you are looking to acquire a property valued at $1,000,000, the bridging loan amount will be 20% of that, equating to $200,000.
Moneylenders will give bridge loans of up to 6X your monthly income. For example, if your monthly income is $25,000, then the loan amount you will be eligible for is $150,000.
3. Can Use CPF to Pay Bridging Loan?
Yes. Anyone can use CPF funds to pay their bridging loan. However, this can only happen if the sale of the previous property is finalized and the CPF savings is refunded. If you are short on funds, you can also apply for a CPF Personal Loan with us!
4. Can I Get a Bridging Loan with No or Bad Credit?
The chances of getting a bridging loan from a bank if you have a bad credit score are meager. However, you can quickly get on as a moneylender uses your credit score to determine your interest rate, and the loan amount is determined by your income and ability to pay.
Closing
While banks and moneylenders offer bridging loan options, the best choice depends on the borrower. However, here are a few reasons why bridging loans from moneylenders can be a great option:
- The loan does not require any collateral like those offered by banks and other major financial institutions.
- The loans are processed within the same day and are available even to people with low credit scores.
- Licensed moneylenders offer lenient eligibility and requirement criteria. The main thing they look at is the ability of the borrower to repay a loan.
Understandably, finding an excellent bridging loan option from licensed moneylenders can be challenging, given a large number of operators. However, it no longer does not have to be the case as Raffles Credit has the best packages. Apply now and get your money on the same day.
