Everything You'd Want To Know About Bridging Loans

Everything You’d Want to Know About Bridging Loans

In Singapore, it’s easy to sell your property and buy a new one using low-interest bridging loans. In 2020, real estate sales rose by 9.2%. Bridging loans from banks played their role dependably. In doing so, many Singaporeans can move into new homes without waiting for their previous property’s buyers.

Bridging loans became center stage once again following the Singapore government’s Temporary Bridging Loan Programme. The program’s main goal: to provide adequate, low-interest loans for economic-halt affected businesses. This government-subsidized bridging loan helped many Singapore small and medium enterprises to transition to digital markets and infrastructure.

In addition, some businesses used bridging loans to make their digital transformation permanent. The loan allowed them to make purchases without waiting to sell their existing assets. Learn more about how you can use bridging loans to your benefit in this post.

What Is Bridging Loan?

Selling an existing property to purchase a new one can take too long without bridging loans. Bridging loans use your sellable property’s equitable value as your loan limit. You won’t need to pay bridging loans regularly. Once you’ve sold your property, the bank collects your principal. 

Maximum Amount Depends on property sale value. Often 20% of existing property value
Maximum Tenure Often 6 Months
Interest Rates 5-6% but dependent on bank evaluation

 

A bridging loan can help you in the following scenario:

Your old property is up for sale. It has a chance to net S $500,000

The new property you want is $1 million in actual value. It requires a S $200,000 down payment

In Singapore, loans can only make up 75% of the total property value (which we know as Loan-to-Value or LTV Ratio). Therefore, you can only borrow S $750,000 to pay the property.

However, your old property has a long wind-up period. Therefore, real estate agents need to evaluate and perform much due diligence until they list it up for sale. In this situation, bridging loans make the transition easier.

Using a bridging loan, you can borrow S $200,000 for the down payment and use S $50,000 from your savings. Afterward, you can borrow S $750,000 from your bank.

However, some banks offer higher bridging loans beyond $200,000. Therefore, you can lower your bank loans by going beyond the S $200,000 down payment up to S $500,000. However, keep in mind that banks charge higher interest because your bridging loan has a higher value.

Bridging loans offer two ways to pay your bridging loan interest:

  1. Capitalised Interest Bridging Loan

The lender will charge bridging loan interest once you sell your property. The bank contract-stipulated fixed equity value pays for your principal. Above fixed equity, the lender will include the interest rate. This payment method allows you to save money. However, banks are taking an added risk with your loan term interest total. Therefore, you will have to pay a higher rate than simultaneous repayment of interest bridging loan.

  1. Simultaneous Repayment Bridging Loan

Borrowers pay their interest monthly while waiting to sell their property. With simultaneous repayment bridging loan arrangements, the property’s fixed equity value pays for the bridging loan principal. Unlike a capitalised interest bridging loan, borrowers don’t pay anything by the end of the loan term.

Bridging Loan: Pros and Cons

With a bridging loan, you can purchase properties without waiting to sell your old property. As always, loans are excellent services when time is essential. Singapore’s Temporary Bridging Loan Programme became successful because it helped its businesses adapt to the new economic conditions. Changing an entire business infrastructure prioritizes time over expenses.

However, a bridging loan is not flawless. It’s a high-risk loan. We highly advise that you examine your total debt servicing ratio (TDSR) and employment stability before taking on bridging loans. Plus, read about the following bridging loan pros and cons.

Pros

  • Fast Application: A bank’s bridging loan requires 14 days until you can fully accomplish them. Therefore, you can provide your estate broker with a set deadline for property reservation and down payment.
  • Lowest Interest Rates: The average Singaporean bridging loan has a 5-6% yearly interest rate charged daily. Truthfully, it varies depending on your bank. A bridging loan in Singapore can go as low as 0.73% with an excellent credit score.
  • A Tool For Raising Capital: Borrowers with no immediate cash can use their sellable property as equity. In doing so, you’ve raised capital using your property’s full value with a little interest increase as payment for convenience.
  • Purchase Properties With No Deposit: A bridging loan uses a property’s LTV as its value basis. Doing this allows borrowers to purchase properties with no deposit. If you allow it, your bridging loan can pay for a huge LTV chunk.
  • Unconventional Property Purchases: Banks and other financial institutions provide a bridging loan for property restoration specialists. If you plan to makeover an aged and worn Singaporean property, you can purchase the property using a bridging loan.

Cons

  • Much More Expensive Than Traditional Mortgages: A bridging loan has a small yearly interest rate. However, traditional mortgages still have the best long-term interest and tenures for properties.
  • Extremely Short Term: Banks leverage a few months or a year as a common timeline to sell properties. Borrowers that go beyond their bridging loan term will suffer immensely from compound interests. Therefore, mortgages still work as the best long-term payment solution.

Bridging Loan: Factors to Consider

Like personal loans, bridging finance can drive you to deep debt with missed loan repayment periods. Before deciding to take on added financial responsibilities, consider the following factors to maximize any banks offer bridging loans.

  1. Total Cost

A bridging loan is much more convenient for borrowers prioritizing opportunities before cost. However, your financial situation may go against your property purchasing plans. In addition, low-interest rates are sometimes offset by high processing fees. Banks may require you to open a bank account with them. Doing this entails maintaining a balance that you must deposit before you receive your bridging loan.

  1. Loan Term Length

Any bridging finance has long loan terms. However, a year might not be viable to sell your property at your estimated price. Always remember that banks can charge you highly if you exceed your loan term payments.

  1. Loan Term Length

Any bridging finance has long loan terms. However, a year might not be viable to sell your property at your estimated price. Always remember that banks can charge you highly if you exceed your loan term payments.

On the other hand, you can pay the bridging loan using your savings. This move is excellent if your sales proceeds aren’t available yet. Taking out a personal loan to pay for a high-interest bridging loan is a riskier but feasible solution for late sales proceeds and avoid high interest, too.

  1. Shop Around and Compare

It’s tempting to go for your next property purchase and go through your property transaction with a bridging loan. However, we highly recommend that you shop around and compare.

A loan with low interest and monthly repayment can most likely have a huge processing fee. On the other hand, you can have small processing fees and monthly repayments but have high interest. To find the perfect working capital before home loans, shop around and compare rates. Assess your income and TDSR’s compatibility with your chosen financing before finalizing your decision.

  1. Interest Rate

Borrowers are right to concern themselves about a loan’s interest. All bridging finance products have a daily charging interest that banks estimate per year. Missing regular repayments leads to penalty fees inclusive of compound interests. On the other hand, interest should serve as a factor for short-term loan decision-making. Processing fees, monthly repayments, and using capitalised interest or simultaneous payment methods will greatly affect your repayments.

  1. Monthly Repayment

Your monthly repayment amount depends on your bank. Most bridging financial services have regular monthly payments because they have one-year loan terms. However, you can expect higher regular payments if the property has an above-average purchase price. With this attribute, banks can help you raise capital. However, you have higher risks of never collecting your sale proceeds to repay the loan fully.

  1. High Risk Level

Bridging finance offers a time-based convenience. You can get your chosen property quickly by paying a bank-specific loan to its owner. However, if the real estate market devalues your property, you’ll have to bolster your sale proceeds with income. Plus, you’ll need to pay interest over these payments too.

Truthfully, all financial products have their respective risk levels. For example, short-term loans, such as bridging finance products, carry higher interest rates than home loans.

Top Bridging Loan Packages You Can Use Today

Here are three of Singapore’s top bridging financial products you can use today!

DBS Bridging Loan Standard Chartered’s HDB Bridging Loan UOB HDB Home Loan
Interest rate Prime rate 3-Month SIBOR Lock-In Period + 2% p.a. 4% to 5%
Loan Tenure Up to 6 months Up to 6 months Up to 6 months
Property type All property types HDB HDB

 

Do SIBOR and SOR Affect Down Payment Amounts?

The Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) affect real estate property value in the country. Therefore, it affects your property’s purchase price and down payment rates. Most property sellers require a 5-10% down payment.

SIBOR and SOR affect bridging finance amounts. However, both factors do not affect bridging finance interest and loan tenure. As a result, you’ll likely need a higher down payment or loan quantum with the same rates and loan tenure.

Should I Still Save Up for Down Payments Than Use Bridging Finance?

If you have the means to finance down payments without bridging products, always choose to do so. Paying an added 5-6% per annum interest above your sellable property’s value is still a huge budget dent. Saving up for a down payment is an excellent choice if time isn’t a purchase price factor.

Can Bridging Financial Products Drive Down Credit Scores?

Any borrower that mismanages any bank financing will face a huge credit score plunge. Therefore, treat bridging finance as if you’re borrowing one or two loans.

Choose Your Financing Wisely!

Bridging financial products are an enormous boon to Singapore borrowers. Selling your old house has never been easier. Always remember, bridging financial products aren’t perfect, so keep in mind the following benefits and struggles you might face with them below:

  • Fast Application
  • Low Interest Rates
  • More Expensive Than Mortgages
  • Intended as Short-Term Financing

If you need excellent financial products from various licensed moneylenders in Singapore, Instant Loan can provide you with three high-quality quotes. With their service, you get access to a huge list of greatly dependable licensed moneylenders. So visit us today to find the perfect bridging finance from licensed moneylenders!

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