There’s an unmatched feeling of confidence and security that comes with having an SME. Most Singaporean business owners know this emotion way too well. No wonder they don’t see the need to get a bridging loan.
Bridging loans are more than just loans. They’re that reliable financial boost that can help you buy new equipment and software, expand your promising SME, pay your employees, you name it. That’s why you should apply for one even if your business is soaring high in the sky amidst the economic turmoil.
Taking the bridging loan route? Good for you! There’s just one thing you need to give extra attention to: The loan’s interest rate. Why should you focus more on interest rates?
What is a Bridging Loan?
A bridging loan is a short-term loan. It’s typically pegged with a 12-month repayment duration. It’s designed to help companies maintain cash flow as they await longer-term financing. Additionally, it simplifies your next property purchase.
It helps clear your new property’s down payment as you await your new property’s sale proceeds (which you’ll receive in CPF funds and cash proceeds).
You can use the property loan for down payment and other charges connected to property transaction as you wait for your current property’s sales proceeds.
There are two loans in banks: A Capitalised Interest Bridging Loan and Simultaneous Repayment Bridging Loan.
In a Capitalised Interest Bridging Loan, a bank covers the whole amount of the new property you plan to buy. As such, repayments start only after you sell your old property. Interest will result over the full tenure of your bridging loan. You’ll clear the entire principal amount and resulting interest.
Meanwhile, a Simultaneous Repayment Bridging Loan requires that you pay several loans simultaneously: The bridging loan and business credit. You have a one-year time frame to sell your old property and repay the loan.
Bridging loans have a higher interest rate (5-6%, depending on the bank) than home loans. This is because banks need compensation for the loss of money use during the loan duration.
A financial institution often offers you a low-interest rate if you’re a low-risk borrower. On the other hand, you might struggle with a high rate if you’re considered a high-risk borrower. This rule applies to bridging loans too.
There are two types of interest rates in banks:
- Effective Interest Rate (EIR)– it takes fees such as processing fees into account. It also considers the frequency of the repayments and loan tenure length.
- Advertised Rate– also referred to as nominal rate, it’s the rate before putting inflation in the picture.
How is Interest Calculated on a Bridging Loan?
Interest rates are variable on bridging loan packages. Interest rate calculations are usually done monthly since the loans are costly. They can range anywhere from 0.4% to 0.2%.
Interest rate calculations are different between banks. For banks, the formula is:
interest rate/ number of payments x principal= monthly interest amount.
Many Singaporeans get their loans from most banks for various reasons. Some of them are that banks offer credit with lower interest rates, the loan application process is fairly mainstream, and flexible loan terms.
Some banks offer bridging loans. They include:
- Standard Chartered
Let’s check out their bridging loans in detail, shall we?
Name of Bank
|Maybank HDB Home Loan||DBS Bridging Loan||Standard Chartered Bank HDB Bridging Loan||UOB HDB Home Loan||
OCBC Home Loan
|Interest Rate||1.4% to 1.6%||Prime Rate||3M SIBOR + 2.00% p.a.||4% to 5%||1.55% p.a.|
|Tenure||At least 6 months||Up to 6 months||6 months||At least 6 months||Up to 6 months|
|Property Type||HDB||All property types||HDB||HDB||Home|
Eligibility and requirements
The following are the qualifications and requirements you need to meet before you can get a loan from a bank:
- Your company must meet the credit criteria
- You must be at least eighteen years old and over
- Your private property must be registered and operating in Singapore
- At least 30% shareholding by Permanent Residents or Singaporeans
- Last six months’ bank statements
- Most recent Personal Income Tax Of Notice Assessment of guarantor(s)/directors/sole proprietors/associates/owners
- Duplicate of NRIC (front and back) of guarantor(s)/directors/sole proprietors/associates/owners
- Last two years’ verified financial statements or audited accounts
Things to Consider Before Getting a Bridging Loan
It’s always important to consider certain factors before you borrow a bridging loan. This helps you avoid headaches and accumulated loan amounts with jaw-dropping interest rates later. Here are those factors:
1. Interest Rate
High-interest rates pose a challenge to your physical and financial health.
They make it impossible to save money and will make loan repayment difficult. Always borrow a bridging loan with the lowest interest rate available. You can determine the lowest by comparing several loans from different banks.
2. Loan Tenure
Loan tenure is the duration you have to pay the loan. It usually ranges from 6 months to a year in the case of bridging loans for banks.
Determine which period works for you before getting the maximum amount of S$1 million. You can do this by studying your financial situation or creating a budget.
3. Monthly Repayment
The repayment amount for bridging loans varies from bank to bank and depends on factors such as the loan amount, loan term, and interest rate. That’s why you should strive to pick a bridging loan from bank with monthly repayments you can comfortably manage, i.e., pay on time.
4. Loan Amount
How much money do you need to buy the new property? Sure, you need a sufficient amount to grow your business, buy new property, etc., but it should be within your budget and reasonable boundaries.
Come up with a plan on how you’ll use the money, know your property’s purchase price, and have a rough estimate of how much you’ll need. This helps you avoid the trap of borrowing more than you can repay or what you really require.
Common Questions On The Topic
Here are among the most asked queries on this topic, plus their answers:
1. Does HDB offer Bridging Loan?
HDB doesn’t offer a bridging loan. Instead, it provides a second HDB loan with conditions. The credit allows you to pay your prospective property’s down payment and initial charges before you can sell your existing property.
2. Can You Get a Bridging Loan With a Bad Credit?
With bank, usually, no. Banks have a varying risk appetite. You’ll be analysed thoroughly based on your credit report from Credit Bureau Singapore if you have bad credit.
3. Can a Bridging Loan Serve As a Substitute for a Personal Loan?
A bridging loan can be a substitute for a personal loan. This is because a bridging loan bridges the money gap as you await a long-term finance option. It provides an enticing caveat like having collateral you need to repay your bridging loan completely.
Bridging loans are convenient, but that’s not to say it isn’t without drawbacks. Its biggest risk is you’re likely to lose your property if you don’t clear your credit on time. So familiarising yourself with interest rates matters. It determines whether the loan is a good choice for you or not. Plus, it helps you know how soon you’ll repay the credit.
- Bridging loans have a higher interest rate (5-6%, depending on the bank) than home loans.
- Bridging loan tenure usually ranges from 6 months to a year in the case of bridging loans for banks.
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