Buying property can be a challenging venture, especially with so many things that have to be taken into consideration. One significant concern is how to finance the purchase, especially the first and second down payments.
While most people can afford the first and smaller cash down payment, the second might be challenging. Typically this is a non-cash payment and is considerably more significant than the first one.
However, even if one does not have the financial muscle to pay for it from their pockets, there are financial solutions to help them. A bridging loan is one of the best solutions for property buyers to pay the down payment on their new property.
What Is a Bridging Loan?
A bridging loan is a short-term loan that property buyers can use to make a down payment on a new property they want to acquire. One can apply for a loan if they have an old property listed for sale, but the property sale is yet to be completed.
The borrower can only use the funds from the loan to make the down payment for their new purchase and not for anything else. In most cases, the loan to value (LTV ratio) for the loan is 20%; however, it may be lower depending on the lender.
This type of loan is offered by banks and financial institutions, as well as licensed moneylenders. Additionally, the two types of bridging loans are simultaneous repayment bridging loans and capitalised interest bridging loans. Below are more details about each type of loan.
Business owners can also get working capital loans the temporary bridging loan programme when in a financial situation when in a financial situation.
Types of Bridging Loans
1. Simultaneous Repayment Bridging Loan
In most cases, when one buys a new home while their old house is still on the market, they will have a home loan and a bridging loan. If you take a simultaneous bridging loan, you must pay concurrently for the bridging loan and home loan.
In such cases, the borrower is typically required to settle the bridging loan in one month or until the old house transaction is completed and they receive the net sales proceeds from it. Borrowers can apply for this bridging loan from moneylenders and banks.
2. Capitalised Interest Bridging Loan
Unlike the other type above, borrowers can only apply for capitalised bridging loans from banks; licensed money lenders do not offer this bridging loan.
This loan only activates the repayment plan after the property purchase succeeds. However, it is crucial to note that one will be required to repay the loan amounts in a lump sum payment. The interest accrued will have to be paid in hard cash.
How Does a Bridging Loan Work?
If a borrower has a property that they are selling, but the sale is yet to go through, they might face difficulty paying the down payment required to secure the purchase of a new home or property.
For most HDB properties, or any other type of property, the buyer must make two down payments; one cash and the other non-cash. Let’s look at an illustration to help you understand better.
Example:
- Existing Property Value (net after sales): $300,000
- New property Value: $750,000
- Down payment: 1st is $37,500 in cash, and the 2nd is $150,000 non-cash) down payment.
- Home loan: 562,500 (75% LTV)
In a bridging loan scenario, a buyer has the cash payment, and they make the first deposit. Then take a bridging loan to cover the second non-cash down payment of $150,000. This will allow them to secure the property.
The borrower can apply for a bridging loan from a bank or moneylender. Of course, there are differences between these two types of providers. One significant difference is that moneylenders bridging loans do not require security, while those from banks do. Also, moneylenders will only give a loan amount equal to or less than 6x the borrower’s salary, while banks might offer more.
Why Take a Bridging Loan?
Let us look at the scenarios below to evaluate your decision to take a bridging loan.
1. En Bloc Sale
This scenario applies to those who sell a property that is a section of an en bloc. In such cases, the borrower will receive good returns from the net sales proceeds from their sale. A bridging loan will be a good option if they want to get a new property quickly.
Also, since the en bloc sale of their old property will be lucrative, they do not have to worry so much about the cost of financing the loan.
2. Selling a Recently Renovated Property
The borrower may have to get a bridging loan because their funds were depleted, removing a home they were renovating for sale.
However, the borrower needs to understand that a home renovation loan might be a good idea since it would allow them to maintain their cash reserves. Also, financing a renovation loan is less costly than a bridging loan.
3. Upgrading a Property
This is a scenario where taking a bridging loan can be an excellent option. However, the borrower needs to evaluate everything about the loan contract before signing it to ensure they are not committing to an agreement blindly.
Factors of Consideration When Selecting Bridging Loans
There are various factors one should consider before selecting a loan. Some of the essential elements are outlined below:
1. Loan Amount
In most cases, especially when one applies for a bridging loan from a bank, the amount is precisely calculated depending on the property’s value. Most banks will cover a 20% LTV ratio of the new property as this is usually the standard amount that most property sellers will require as the second non-cash down payment.
On the other hand, licensed money lenders will only provide loan packages that offer up to 6X the borrower’s monthly income. One should only take the precise loan amount they require, as taking a more considerable loan than is needed will mean they will have to pay more interest.
2. Interest
Like any other type, a loan’s interest rate is crucial. The higher the interest rate, the borrower will have to pay more in terms of the loan repayments. Therefore, the borrower must evaluate the options available to determine the ideal bridging loan amount for their needs and capability of payments.
Different interest rates are charged depending on the lender. Most licensed money lenders charge an interest rate of 1-4%. This is typically higher than what most banks will charge. However, this is understandable given that moneylenders do not require security while banks do. Also, the difference between the rates is not that huge.
3. Monthly Repayments
If one takes a simultaneous repayment bridging loan from either a bank or money lender, they will be required to pay monthly premiums for their loan. One should ensure that they get a proper breakdown of their loan payments, as this will help them determine whether or not they will be able to make those monthly repayments.
4. Tenure
The tenures of bridging loans range from one month until the time when the borrower can complete the sale of their old property.
5. Risks Associated with Secured Loans
As with most secured loans, taking a bridging loan from a bank will require you to ensure it. If you default on the loan, the bank will seize the collateral to facilitate the repayment of the principal loan amount and accrued interest.
However, this is not the case with bridging loans from moneylenders. Bridging loans from moneylenders are unsecured and do not require security. In case of a default, the borrower’s name is listed with the credit bureau as a default.
Top 5 Bridging Loans in Singapore
Some banks and moneylenders offer bridging loan packages in Singapore. To make it easy for readers to choose a good option, let us look at the table below to compare some of the top loan options available on the market.
|
|
Standard Chartered Bridging Loan |
UOB Home Bridging Loan |
Maybank Home Bridging Loan |
DBS Bridging Loan |
Licensed Money Lender Bridging Loan |
|
Interest Rate |
3-month SIBOR + 2% PA |
4-5% PA |
Best industry rates |
Prime rate |
1-4% per month |
|
Loan Tenure |
6 months |
6 months |
Max of 4 years |
6 months |
One month or until the completion of the sale of the old property sale |
|
Loan Amount |
Depended on borrower |
Depended on borrower |
Depended on borrower |
Depended on borrower |
Up to 6X of the borrower’s monthly income |
|
Credit Score Required |
Good-high score |
Good-high score |
Good-high score |
Good-high score |
A credit score is only used to determine the interest. |
|
Security |
Required |
Required |
Required |
Required |
Not required |
Insights from The Comparison Table
- Banks offer bridging loans with a more significant loan quantum compared to moneylenders.
- Banks will require the borrower to offer collateral, while money lenders do not.
- Money lenders only use the borrower’s credit score to gauge the interest rate to charge; even a person with bad credit can still get a loan. On the other hand, banks typically give loans to people with good to high credit scores.
- Banks have lower interest rates because they require collateral.
Why are Licensed Moneylenders a Great Option as Well?
While banks provide bridging loans, licensed moneylenders can also be an excellent option. Below are some of the reasons why a moneylender bridging loan can be a great alternative:
- One of the best things about bridging loans from money lenders is that they have more lenient requirements than banks.
- No security is required before the borrower can be given the loan.
- No credit score is used to determine whether or not the borrower loan application is approved. For this, they use the monthly income of the borrower.
- The application and approval process is far quicker than that of banks. The borrower can receive the fund the same day, unlike in banks, where it may take up to a month.
- There are lower processing fees since the borrower is given the loan amount in cash at the lender’s office, unlike banks where the funds are disbursed electronically, which will incur more fees.
Applying with Licensed Moneylenders
Eligibility and requirements
Let us look at the eligibility and requirements needed when applying for a bridging loan with top licensed money lenders such as Raffle Credit:
- Identity Card such as NRIC
- Employment proof
- Proof of residence
- Copy of OTP (Option to Purchase)
- SingPass
Applying with Banks
Eligibility and Requirements
- Identity Card such as NRIC
- Employment proof
- Proof of residence
- Copy of OTP (Option to Purchase)
- SingPass
In addition to the above, the bank you are applying through will need you to provide additional documents and requirements. You can get all the necessary details by asking at the bank of your choice.
Alternatives to a Bridging Loan
Personal Loan
Both licensed moneylenders and banks offer personal loans. Since these can be used to do anything, the borrower can use the fund to make a down payment for their new property. Money lenders do not require collateral for personal loans.
HELOC
HELOC loans are designed, so the borrower uses their home equity as collateral when borrowing the loan for the first time. However, as they continue to pay, the equity grows back, and thus they can borrow more even before completing their first loan repayment. This option is only available via banks as many moneylenders do not offer this loan. Lean more on the differences between bridging loan and HELOC.
Home Equity Line
Unlike HELOC, the borrower is given the loan as a lump sum payment, and their equity is only available if they pay the whole loan in full. However, this loan has a more extended repayment than the two mentioned above.
FAQs
1. What is the purpose of a bridging loan?
To cover the down payment of a new property as you wait to sell your old property.
2. Is a bridging loan a personal loan?
No. These are two different loans. A bridging loan is only used to help you acquire a new property, while a personal loan can be used for anything.
3. How long does a bridging loan can take?
In most cases, the loan tenure will be a month or until your sale of the old property is completed.
4. Can I get a bridging loan with no or bad credit?
You will have a low chance with banks as this is one of the main factors they consider. However, you can get a loan with money lenders as they only look at your income and net sale proceeds to determine the loan to give you.
Closing
Bridging loans can be helpful for people looking to acquire new property even though their old property has not yet been sold. One of the best things about this type of loan is that you can apply from a bank or a licensed money lender. Here are a few things to take away:
- Banks offer more significant loan amounts than moneylenders. On the other hand, money lenders never ask for security for their loans, while banks do.
- A credit score is one of the main things that the banks will look at to decide whether or not to give you a loan. On the other hand, moneylenders will look at your monthly income to determine the loan amount you provide, and the credit score is only used to determine the interest rate you will be charged.
- Moneylenders process bridging loans quicker than banks. In most cases, they take only a day, while banks will take up to a month
Are you looking for the best bridging loan packages in Singapore? Raffles Credit is among the best money lenders with great bridging loan packages. You do not have to take our word for it; just read the fantastic reviews from all the people we have served. Contact us today to get a quotation for a bridging loan and other types of loans.
