You’ve decided to move to a new home, and after months of looking at what the market has to offer, you’ve finally found the perfect choice. All that’s left is to buy it before anyone else, but since you haven’t sold your old house yet, how do you come up with the funds? That’s where a bridging loan comes in.
A bridging loan is a short-term loan you can apply for over your existing home loan. It allows you to purchase a new property before the sale of your existing property that still has an existing mortgage attached. This makes it easier to transition, as it may take a while to find buyers AND a new property to move into.
Note: Before reading through the rest of the article, do note that the subject matter is regarding property bridging loans, which is financing that helps homeowners when buying and selling properties. Not to be confused with the Temporary Bridging Loan Programme (TBLP), which is a government programme that helps provide working capital to businesses.
How Does Bridging Loan Work?
To better explain how bridging finance works, let’s take this sample bridging loan scenario:
Let’s say you have an apartment with a current real estate market value of S$500,000, and you found a perfect condominium unit with a property value of S$1,000,000. You need to pay a down payment of 25%, with the 20% being non-cash and the 5% you’ll like be able to afford to pay in cash.
Naturally, you would apply for home loans for your next property purchase. Assuming you qualify for a 75% Loan-to-Value limit for the home loan, you still have the 25% to worry about, valued at S$250,000.
That remaining value, called the shortfall, can easily be covered when you sell your old property and get your sales proceeds–the operative word being when. With your home loan coming up short, and your current funds only being able to cover the 5% cash down payment for the new property, what can you do?
This is where a bridging loan can come in to cover the shortfall of your existing home loan.
You can take a bridging loan of S$200,000 to pay the non-cash down payment, and cover the remaining S$50,000 with your own funds.
To put it simply, a Singapore bridging loan provides you a bridge that allows you to cross the financial crevasse between buying and selling properties. It allows you to cover the remaining amount you need to make the property purchase price when your home loan falls short, despite not having sold your existing property.
More on Bridging Loans
- One financial institution, two loans. Financial Institutions that offer bridging loans will likely also offer home loans. They will also take up the remaining mortgage on your old property.
- Peak Debt. The total amount that includes all the money you’ve borrowed from a financial institution, plus the remaining mortgage on your old property. For example, you had a remaining mortgage of S$300,000, and you had to borrow S$800,000 for the new house, your peak debt is S$1,100,000
- End Debt. Once you sell your old home, you can use the proceeds to cut down your peak debt. This is called the “end debt”. Say you sold your old home for S$600,000, this will be subtracted to your peak debt of S$1,100,000, giving you an end debt of S$500,000.
- Loan Repayments. Loan repayments will change during the bridging period. Depending on the loan structure you might only have to pay for your current mortgage. Likewise, after the bridging period, loan repayment may be higher than before you applied for a bridging loan since you technically will be paying for two loans at the same time.
When Are Bridging Loans a Good Idea?
Bridging loans are great when transitioning from your old property to a new one, especially when you’re in the middle of an existing property sale and you want to purchase the new property quickly. It’s also common for people to go for a bridging loan went they are upgrading from an HDB flat to a new property or house because of the large payments.
Generally speaking, a bridging loan can be used not just for purchasing private property as a supplement to home loans, but for all property types, including HDB flats.
Factors to Consider When Choosing a Bridging Loan
There are many financial institution that offer bridging loans, so do note that these factors may vary from each financial institution.
Bridging Loan Amount
A standard bridging loan can only provide up to 25% of the new property’s purchase price.
Bridging loans have interest rates that fluctuate between 5% to 6% p.a., much higher than the usual rates of home loans.
When it comes to loans, it’s always important to consider if you can handle the loan repayments that come with it. A bridging loan is no different, as on top of your mortgage, the monthly payments can get hefty.
Bridging Loan Tenure
A bridging loan is a short-term loan, usually with up 6 months tenure. Shorter tenures can accrue higher interest charges, so be wary.
Factor in the total cost of a bridging loan, especially between different financial institution. It’s important to not only factor the loan quantum, but also the additional interest and fees that you will have to for overall.
If you’re applying for a bridging loan to preserve your cash on hand or CPF funds, you’re much better off using what you have as a bridging loan will likely cost you more.
Pros and Cons of a Bridging Loan
Selling your old property to buy a new house is a big financial decision. Even though a bridging loan can help mitigate the weight of a large purchase price as you wait for your sales proceeds, it’s important to weigh the pros and cons that come with it measured in consideration of your personal circumstances.
There’s a slim chance that you’ll luck out and have the sale of your existing property coincide with the availability of your new home. A bridging loan can help you buy your new place without having to wait for the net proceeds from the sale of your old one.
- No Need to Rent
A bridging loan can help mitigate the possibility of having to be “in-between houses”. With the right timing, you may not have to rent during the short period between selling your current home and settling into the new one.
There’s a likelihood that you still have a remaining mortgage on your original property (the one you are selling). During the bridging period, when money is tight, it’s possible that the only repayments you’d need to make are on said mortgage. This of course depends on the terms of the loan.
A bridging loan will have a high interest rate charged monthly. With the short tenure, the more interest costs will rack up the longer you take to sell your old property.
You’ll usually be charged a higher interest rate if you are unable to sell your existing home within the bridging period.
An important bit of financial advice is to not go over the amount you need to complete the property transaction because of this.
As mentioned earlier, you might be bound to have property valuations for both your new property and the current one, which means more fees and charges alongside the interest rates.
There is a possibility that the financial institutionfor your current home loan will not be able to offer you a bridging loan, forcing you to opt for a different financial institution. This will likely result in you incurring early exit fees from your current loan, more so if you’re doing so during a period of fixed interest rate.
A bridging loan can be quite the daredevil move, because of the possibility of you not selling your old property, or not selling it for high enough.
As mentioned earlier, not being able to sell during the bridging period will get the interest costs racking up, with the possibility of the bank stepping in to sell your existing property.
If you sell your property for a lower price than you originally planned, you would have a larger end debt that prior to your bridging loan, putting you in a more difficult financial situation.
Keep in mind to factor in the current market conditions, whether they are favourable to your sale, and make sure that you’ll be able to sell for more than your remaining mortgage.
Types of Bridging Loans
You’ll find two main types bridging loans during your search, and these are capitalised interest bridging loan and simultaneous repayment bridging loan.
Capitalised Interest Bridging Loan
A capitalised interest bridging loan is a great option for when you don’t want to pay for a couple of loans simultaneously.
This will have the bank shoulder the purchase of your new home, and have the mortgage repayments start charging only when you’ve finally been able to sell your old house.
Simultaneous repayment bridging loan
As suggested by its name, a simultaneous repayment bridging loan will get you to service the home loan for your new home and the bridging loan at the same time.
You would have 12 months to sell your old property and start repayments.
Top Bridging Loan Packages Being Offered by Banks
Because of the possibility of termination fees, it’s usually better for you to stick with the bank that is currently financing your mortgage.
Still, it doesn’t hurt to peruse, and it’s important to see the differences in the way banks offer bridging loans. So here are some of the best bridging loan packages for you to check out.
|Standard Chartered’s HDB Bridging Loan||UOB HDB Home Loan||DBS Bridging Loan|
|Interest Rate||3M Sibor + 2% p.a.||4% to 5%||Prime rate|
|Tenure||Up to 6 months||Up to 6 months||Up to 6 months|
|Property Type||HDB||HDB||All property types|
Eligibility and Application
The application process for a bridging loan will largely be different from other home loans. Depending on your chosen financial institution and product the criteria may vary.
- Singapore citizens, permanent residents, and foreigners may be able to apply.
- Currently in the process of selling their property in Singapore.
- As with most loans, a good credit score is a common requirement.
- Some banks require that you are currently one of their borrowers.
- Option to Purchase (OTP) document as proof that you have exclusive access to purchase the said property.
- CPF withdrawal statements and outstanding bank loan statements for determining the proceeds that will be available.
Preparing a Back-Up Plan
What if people decided that purchasing your property is not an investment decision they want to make. Now you won’t be able to sell your house, putting the proverbial wrench in your plans.
This is the worst case scenario, but even though there is a small likelihood of you encountering this misfortune, it’s always better to be ready.
This is why it’s important to thoroughly review the terms of your bridging loan before getting it. Check for any “exit clauses” on the off chance the sale of your old place doesn’t go through. Learn how will it go, and what penalties you might incur.
Points to Ponder
The most important points to remember are:
- Consider the amount of costs you may incur in total, adding up the loan amount, interest, and fees.
- A lot rides on selling your current home. Make sure that there is a market for the listing and that you can make a lot from it. The higher the value, the better.
- Offerings will vary depending on your chosen financial institution. Make sure to check and recheck your many options.
As always, making any sort of financial decision requires you to do your own extensive research to make sure that you’re getting the most out of your choices.
This is no different from choosing a bridging loan, so for the best loan comparison service in Singapore, check out our loan comparison services at Instant Loan.