If you have plans of buying a new home while still in the process of selling your current home, you may need a bridging loan before the sale of your old home is finalised.
But first you need to know how bridging loan works.
In this article, you will not only know what a bridging loan is but also learn how bridging loan works, and when you should get it.
You will also learn about other factors to consider before going for a bridging loan, and the types of bridging loans available.
What Is A Bridging Loan?
A bridging loan refers to the money you receive from a bank or a licensed money lender to facilitate any pending bills as you wait to receive funds from the sale of your current home. It is also known as a bridge loan.
It appears that the term “bridge” is used strategically to refer to what the loan does. Yes, the money you get from a bank or licensed money lender is meant to bridge or seal a gap. This gap refers to the period between the time you are required to pay the lender the downpayment for the new property and when you receive proceeds of the property you just sold.
To illustrate, let’s say you have done all the necessary steps with the intent of upgrading your property. By now, you have signed all the required documentation regarding the sales and purchase agreement.
But you realise you need to pay your initial downpayment. But you do not have any cash left with you because you’ve yet to receive the proceeds from the sale of your previous property. That is where a bridging loan from a bank or registered money lender comes in handy.
It is advisable to apply for a bridging loan from the same bank that gave you your current mortgage.
Facts About Bridging Loans
You may have heard that bridging loans whether from a bank or a licensed money lender come with certain restrictions with one in particular, a 20% of the value of the property. That is true.
However, you may not be able to get the maximum loan from a bank. But you can get the maximum limit approved on the condition that the proceeds from the sale of your old property cover the cost.
Interestingly, you can even use it to get a lower LTV ratio. But what is the LTV ratio all about?
What Is The LTV Ratio?
The loan-to-value (LTV) ratio refers to the amount you can get from a lender for a property. The higher the LTV ratio is, the higher the risk for the lender. In this regard, a low LTV ratio is better.
Expressed as a percentage, the LTV ratio measures the ratio between the amount you are asking to borrow and the current market value or price of the property, whichever is lower.
How A Bridging Loan Can Lower Your LTV Ratio
To see how a bridging loan can help you lower your LTV ratio, consider the following scenario:
- New property price: $1,000,000
- The maximum loan quantum: $750,000 (75% LTV)
- Required non-cash downpayment: $200,000
- Expected proceeds from your previous property (you haven’t received it yet): $500,000
Since you haven’t received any money from the sale of the previous property yet but need to pay the downpayment, you apply for a bridging loan of $200,000 from a money lender. This amount will go to the non-cash downpayment.
You will still need an additional $50,000 from another source for the 5% downpayment that you must pay in cash, leaving the bank’s $750,000 to cover the rest of the payment.
As you can see, you’ll remain with an extra $300,000 after the repayment. This way, you will now comfortably put the extra amount into your new home.
However, you have two options ahead of you.
The first is to take the full loan of $750,000, and wait until you hit a repayment penalty. At the end of the penalty, repay the required $300,000 all at once.
The second option is to set a higher bridging loan quantum. In this case, you ask your licensed money lender to give you $500,000 instead of $200,000. With this option, you will only be required to get a home loan of $450,000 (45% LTV).
When you receive money from the sale of your previous property, repay the $500,000 bridging loan and any additional bridging loan interest that would have accrued, thanks to the higher quantum.
Factors To Consider Before Applying For A Bridging Loan
Before you take up a bridging loan, consider the following factors:
Interest Rate
One thing that is known about bridging loans is its extremely high interest rate. So do not be surprised to learn that you’ll be charged a bridging loan interest rate of 5-6% interest per annum, or even more. You’ll see that compared to the roughly 2.5% per annum interest for home loans, the 6% is very high.
However, the good thing is you can pay off the interest first as you sort out the loan repayment later. Of course, this depends on the money lender or bank you intend to get the loan from.
Loan Amount
Before you take up any bridging loan, it is prudent to know that it is the standard rule that a bridging loan only finances an amount that does not exceed 25% of your new purchase.
So when you look at the high interest rate you are going to pay and the short period you will be required to repay the loan, it makes sense that you should only borrow the exact amount that you need, and no more.
This amount is what will help you meet the initial downpayment and complete the transaction.
Monthly Repayments
Do your calculations before applying for a bridging loan. If the amount you are required to repay each month is manageable, go for that bridging loan.
However, if you are going to struggle to make ends meet after making the repayment every month, think twice. It is imperative that after paying the monthly installments, you can still feed your family and live your life smoothly.
Loan Tenure
As mentioned, bridging loans are usually short-term. However, the period may differ slightly or greatly depending on the bank or money lender you are working with.
Knowing that you will be required to repay the loan within a short period prepares you to do your calculations well in advance.
Risks Involved
Are there any risks involved in taking a HDB bridging loan? Yes, to an extent. But there is no cause for alarm. Just be aware that when you pledge an asset as collateral, you risk losing it if you are unable to repay your loan.
Do not also forget that you are getting yourself into debt when you haven’t received proceeds of the previous sale. What if the deal falls through yet your bridging loan in Singapore has been approved?
Think of the risk of repaying a huge bridging loan that has a high interest rate and a short tenure – while the “gap” you wanted to bridge has widened. It is not easy.
What Are The Pros And Cons Of A Bridging Loan?
Whether you are dealing with a bank or a licensed money lender, bridging loans come with pros and cons in equal measure.
Here are some of the advantages and disadvantages of taking a bridging loan:
Pros
- You can get the money quickly
- It is easy to borrow a huge amount of money
- Flexible repayments
- Easy to secure loans on high-end properties
Cons
- Bridging loans are secured loans, thus you need a collateral – you risk losing your asset or property in case you fail to repay
- Higher interest rates
- Additional expenses
Eligibility Criteria
You do not have to be employed to apply for a bridging loan. But you must prove beyond reasonable doubt that you can repay the loan.
Otherwise, you risk losing the property you pledged as collateral.
Documents Required
- NRIC
- Proof of residence – this can be in a form of utility bill, tenancy agreement, or a letter addressed to you
- Three months’ computerised receipts if employed, or letter of employment
- CPF withdrawal and outstanding bank loan statements
- Copy of the Option To Purchase (OTP) that shows have an exclusive right to buy the new property in Singapore
- Credit report
After you get these documents ready, you can begin the process of applying for a bridging loan in Singapore.
How To Apply For A Bridging Loan
The process of applying for a bridging loan varies from one licensed money lender to another and from bank to bank. However, here are the steps of applying for a bridging loan in Singapore:
- Choose a lender, be it a bank or licensed money lender.
- Submit the completed registration form required documents.
- The lender checks if you meet the eligibility criteria.
- If your application is successful, the loan is then disbursed to you.
Lenders That Offer Bridging Loans
As mentioned from the previous sections, you can get a bridging loan from banks in Singapore. In addition, a number of licensed money lenders are available to help you get the necessary bridge loan.
Licensed Money Lenders
A good licensed money lender to try is CreditMaster, which offers quick processing time, reasonable rates, and expert advice.
Always ensure the lender you choose is licensed. Look up the Ministry of Law’s list of licensed money lenders in Singapore online and verify the lender’s details.
Banks
These include:
- Standard Chartered Bank
- DBS Bank
- Maybank
- United Overseas Bank
Choose The Right Bridging Loan
Now that you know how bridging loan works, you can start looking for one. CreditMaster is here to help you as you wait for the proceeds of your old home to come through.
We’ll guide you in a faster, reliable and convenient manner. We will ensure you understand the terms and conditions of the bridging loan. As long as your documents are ready, we can approve the loan as quickly as you need it.
Get help from our friendly loan officers or get started by applying for a loan now.
