Guide to Bridging Loans in Singapore
What is a Bridging Loan?
A bridging loan is a short-term loan designed to help homeowners in Singapore bridge the gap between the downpayment of a new property and the sales proceeds of their existing property. When you take a bridging loan, it provides immediate funds to cover the down payment for the new property on the purchase completion date, this is useful if your sales proceeds cannot make it in time for the down payment.
In essence, a bridging loan in Singapore acts as a temporary short term loan for cases where the purchase completion date is earlier than the sale completion date. These loans are particularly useful in competitive real estate markets, where timing is crucial and delays can result in losing out on desirable properties. The key advantage of a bridging loan is this ability to provide quick access to substantial funds, thus facilitating seamless property transactions even in time-sensitive situations.
However, it is important to note that bridging loans typically come with higher interest rates compared to regular home loans due to their short-term nature and the increased risk taken on by the lender. Despite this, many homeowners or property investors in Singapore may find the convenience and flexibility of bridging loans to be worth the additional cost, especially when the alternative is missing out on a prime property opportunity.
How do Bridging Loans Work?
Whether you’re transacting your HDB flat or private property, understanding how bridging loans work will be useful. Essentially, a bridging loan provides the necessary funds to pay for the down payment of your new property before you receive the sale proceeds from your existing home.
Here’s a closer look at how this process unfolds in Singapore.
Option-to-Purchase
Firstly, the borrower will need to have sold his current property by providing the bank the Option-To-Purchase (OTP). Both bridging loan and mortgage loan will be provided by the same bank.
Loan Approval and Disbursement
Once approved, the funds from the bridging loan are disbursed to cover the initial costs of purchasing the new property. This includes the initial 20% down payment required on completion date, which can be a significant financial hurdle if not managed properly.
Maintenance of Mortgage Payments
The borrower then continues to pay their existing mortgage until the sale of their current property is finalised.
Post-Sale Start of Bridging Loan Repayment
Upon the sale of the existing property, the proceeds are then used to repay the bridging loan. This repayment typically includes the principal amount borrowed plus any incurred interest. It’s important to note that the interest on a bridging loan can be higher than that of standard home loans, so individuals planning on taking on a bridging loan should plan their finances accordingly.
Additionally, it’s important to consider the different types of bridging loans available, each catering to specific needs and circumstances. For instance, some loans require simultaneous repayment, where you make payments on both your existing mortgage and the new loan. Others might capitalise the interest, meaning you only pay the interest once the sale of your property is complete. The type of bridging loan you apply for will affect your future repayment schedule, and come with its own pros and cons. Do take note that every bank will have their own terms and conditions on the type of bridging loan offered.
Types of Bridging Loans in Singapore
In Singapore, there are several types of bridging loans available to cater to different financial needs and situations. Understanding the distinctions between these types can help you choose the most suitable option for your circumstances.
Capitalised Interest Bridging Loan
A capitalised interest bridging loan allows you to defer the interest payments until the end of the loan term. This means that you don’t have to make monthly interest payments during the loan period. Instead, the interest is added to the principal amount and paid off once your existing property is sold. This option can be beneficial if you need immediate funds without the burden of additional monthly payments.
Simultaneous Repayment Bridging Loan
With a simultaneous repayment bridging loan, you are required to make monthly payments on both your existing mortgage and the new bridging loan. This type of loan can be more challenging to manage as it involves handling two sets of loan repayments. However, it can also be advantageous if you have sufficient cash flow and prefer to reduce the overall interest cost by paying down the loan sooner.
Interest-Only Bridging Loan
An interest-only bridging loan allows you to pay only the interest during the loan term, with the principal amount due at the end. This option provides a balance between immediate cash flow relief and manageable repayment obligations. It’s suitable for those who need to minimise their monthly expenses while waiting for their existing property to sell.
Why do People Opt for Bridging Loans?
Some people may view bridging loans as a risky option to consider, largely due to the fact that you are taking on a large loan commitment before receiving your sales proceeds. So why are homeowners in Singapore still opting for bridging loans? This is because bridging loans have certain unique benefits and advantages to help address specific financial needs during property transactions:
Quick Funding
One of the primary reasons people choose bridging loans is the quick access to funds. When you need money for a down payment on a new property, a bridging loan can provide the necessary capital promptly, ensuring you don’t miss out on purchasing opportunities due to timing issues. Considering how competitive the Singapore real estate market is, a bridging loan could provide the short-term capital injection you need to close a property deal fast.
Short-Term Timeframe
Bridging loans are intentionally designed to be short-term, typically lasting up to six months. This short duration makes them an ideal solution for temporary financial gaps, particularly when you expect to receive funds from the sale of your current property within this timeframe.
Flexible Repayment
Some bridging loans offer flexible repayment terms, allowing you to tailor the loan to your financial situation. Whether you prefer capitalised interest or simultaneous repayment, these options can help manage your cash flow more effectively during the transition period. Do take note the option(s) available is up to the bank’s sole discretion.
Cash Flow for Renovation
For homeowners looking to renovate their new property before moving in, a bridging loan can provide the necessary cash flow. This ensures that renovations can be completed without delay, making the new home move-in ready by the time you complete the sale of your existing property.
Why You Should Not Get a Bridging Loan
While bridging loans do offer several benefits, they are not suitable for everyone. There are specific situations where opting for a bridging loan might not be the best financial decision.
- No Strong Influx of Money to Repay: If you do not have a guaranteed source of funds to repay the bridging loan, taking on this type of debt can be risky. Do ensure that prudent financial planning is done with regards to the cash proceeds of your property sale before committing to a bridging loan.
- Risk of Losing your Collateral: High-interest rates and short repayment periods mean that bridging loans can quickly become unmanageable if your financial situation changes. Banks will likely impose penalties and in extreme cases, failure to repay the loan may lead to you losing your collateral asset such as your property.
- High Interest Rate: Bridging loans typically come with higher interest rates compared to standard home loans. If the interest rate is too high, the cost of borrowing can outweigh the benefits, making it an expensive option for short-term financing.
Costs Involved in Getting a Bridging Loan
If you have concluded that a bridging loan is the best financial option for you, be aware of the following cost involved. Seek clarity from your loan provider if necessary:
Interest Rates and Fees
Bridging loans often come with higher interest rates compared to regular home loans due to their short-term nature and higher risk. Additionally, law firms may charge a higher legal fee when there is a bridging loan involved.
Penalty Charges for Early Repayment or Default
If you repay the bridging loan before the agreed term or default on the loan, you might incur penalty charges. These penalties can be substantial, adding to the overall cost of the loan. It is crucial to understand these potential charges and factor them into your financial planning.
When are the Common Scenarios where People will Opt for Bridging Loans?
Several scenarios might necessitate the use of a bridging loan in Singapore. Understanding these scenarios can help determine if and when a bridging loan is the right solution for your needs.
When Buying Comes Before Selling
Buying a property can be an emotional journey, in cases where there is a lack of funds available for the purchase completion, a bridging loan helps to bridge this gap while awaiting the sales proceeds.
For An En Bloc Sale
In the case of an en bloc sale, where multiple units in a building are sold collectively, a bridging loan can provide the funds needed to purchase a new property while waiting for the sale proceeds from the en bloc transaction.
When Additional Cashflow Is Needed
Be it a HDB or private property, there are times when additional funds need to be set aside for renovation. A bridging loan may prove useful in funding the purchase completion while spare cash on hand be used towards renovation instead.
What to Consider Before Getting a Bridging Loan in Singapore
Before opting for a bridging loan in Singapore, several critical factors need to be considered to ensure it aligns with your financial situation and goals.
- Your Property as Collateral: Bridging loans typically require your property as collateral. It’s essential to understand the risks involved, as failure to repay the loan could result in the loss of your property.
- Proper Property Valuation: Ensure that your property is accurately valued to avoid borrowing more than necessary or facing issues with the loan approval process. Proper valuation also helps in understanding the equity available in your property.
- Capitalised Interest vs Simultaneous Repayment Bridging Loan: Consider the different repayment structures available, such as capitalised interest versus simultaneous repayment, and choose the one that best suits your financial situation and cash flow needs.
- Backup Plan: Have a backup plan in place in case the sale of your old property doesn’t go through as expected. This could include alternative financing options or a contingency plan for managing loan repayments.
- Assessing Your Financial Situation: Evaluate your overall financial health, including your income, expenses, and other debt obligations, to ensure you can comfortably manage the bridging loan repayments.
Where to Apply for a Bridging Loan?
Applying for a bridging loan in Singapore involves selecting the right lender. Here are some general institutions where you can apply:
- Giant Banks: Most major banks in Singapore offer bridging loans, amongst other options such as private house loans and housing loans for under construction property. These banks provide structured loan packages with clear terms and conditions, and they are generally considered reliable and trustworthy. Applying through a bank can also offer the benefit of competitive interest rates and comprehensive customer service.
- Licensed Money Lenders: Licensed money lenders in Singapore can also provide bridging loans. These lenders might offer more flexible lending criteria compared to traditional banks. However, it is crucial to ensure that the money lender is licensed and adheres to the regulations set by the Ministry of Law to avoid potential legal and financial issues. You may find a list of licensed money lenders here.
How to Apply for a Bridging Loan
Applying for a bridging loan in SG involves several key steps. Understanding this process can help streamline your application and improve your chances of approval:
Assess Your Financial Needs
Determine the exact amount you need to borrow and ensure that a bridging loan is the right solution for your financial situation.
Choose a Lender
Research different lenders, including banks and licensed money lenders, to find the best terms and interest rates. Compare the offerings to select a lender that meets your needs.
Submit an Application
Complete the application form provided by the lender. Ensure all required information is accurate and complete to avoid delays in processing.
Provide Necessary Documents
Gather and submit the necessary documents, including your NRIC, income statements, CPF statements, and details of your current property and the new property you intend to purchase.
Engage a Lawyer:
Hire a reputable conveyancing lawyer to handle the legal aspects of the loan. Ensure the lawyer is on the panel of the chosen bank or lender.
Await Approval
Once the application and documents are submitted, wait for the lender to process your application. Follow up regularly to check the status and address any additional requirements.
Receive Funds
Upon approval, the funds will be disbursed to cover the down payment or other immediate financial needs related to your property purchase.
Before applying for the bridging loan you should also ensure you meet the eligibility criteria set out by the bank or loan provider. Eligibility criteria for a bridging loan typically includes having a stable income, a good credit score, and sufficient equity in your existing property. Lenders will also assess your ability to repay the loan based on your financial situation.
Finally, ensure you have all the necessary documentation needed to process the loan application:
- NRIC or other identification documents
- Proof of income (salary slips, tax returns)
- CPF statement
- Option-To-Purchase (OTP) for the new property
- Option-To-Purchase (OTP) for current property
What’s the Difference Between Personal Loan VS Bridging Loan?
You may have considerations about getting a bridging loan versus a personal loan, or are unsure if a personal loan might be a better choice. Understanding these differences between a personal loan and a bridging loan can help you choose the right financing option for your needs:
Lending Criteria
Bridging loans typically have more flexible lending criteria compared to personal loans. This flexibility is due to the short-term nature of bridging loans and the use of property as collateral.
Repayment Period
Bridging loans generally have shorter repayment periods, usually up to six months. In contrast, personal loans can have longer repayment periods, ranging from one to seven years, which can result in higher accumulated interest over time.
Risk of Losing Your Property
With a bridging loan, your property serves as collateral. Failure to repay the loan could result in the loss of your property. Personal loans, on the other hand, are usually unsecured, so there is no risk of losing your property, although other assets could be at risk if you default.
Advance Payment Fees
Personal loans might come with advance payment fees if you decide to repay the loan early. Bridging loans can also have similar penalties, so it’s essential to understand the terms and conditions before committing to either type of loan.
Affecting TDSR
If you take up a personal loan and it gets reflected in your Credit Bureau Statement, it will impact your Total-Debt-Servicing-Ratio (TDSR). This will reduce the amount of mortgage loan that you qualify for.
Frequently Asked Questions About Bridging Loans
The amount you can borrow from a bridging loan typically depends on the value of your existing property and the lender’s criteria. Generally, you can borrow up to a certain percentage of your property’s value.
Interest rates on bridging loans are usually higher than standard home loans due to their short-term nature. Rates can vary between lenders, so it’s important to compare offers. At the time of writing, estimate it to be around 4%.
Bridging loans can be a good idea if you need quick access to funds for a property purchase and have a clear repayment plan. However, due to higher interest rates and potential risks, they are not suitable for everyone.
It can be challenging to obtain a bridging loan with bad credit, as lenders prefer borrowers with good credit histories. However, some lenders might be more flexible if you have substantial equity in your property.
You can obtain a bridging loan from major banks, licensed money lenders, and some financial institutions that specialise in short-term financing solutions.
Requirements typically include proof of income, a good credit score, substantial equity in your existing property, and necessary documentation such as identification, income statements, and property details.
Depending on what you require, some considerations include personal loans from banks and bridging loans from licensed money lenders.
Yes, the type of property can affect the interest rate and terms of a bridging loan. Residential properties might have different rates compared to commercial or investment properties.
Not all banks offer bridging loans. It’s important to research and approach banks or financial institutions that specialise in this type of loan.
Depending on what you require, some considerations include personal loans from banks and bridging loans from licensed money lenders.
CPF funds can typically be used to repay the mortgage on your new property once the bridging loan is repaid, but they are not usually used to directly repay a bridging loan.
Yes, demonstrating a stable income is usually required to qualify for a bridging loan, as lenders need to ensure you can meet the repayment obligations.
Bridging loans are designed to facilitate the purchase of a new property in Singapore while waiting for the sale of an existing one. Without selling your existing property, it might be challenging to secure this type of loan.
It’s advisable to borrow only what you need to cover the immediate costs associated with buying your new property. Borrowing more than necessary through the bridging loan can lead to higher interest costs and increased financial risk.