what is bridging loan

What Is a Bridging Loan? Here’s Everything You Need to Know

Selling a property quickly in Singapore isn’t always an easy task. If you’ve sold your old property but don’t yet have the down payment funds ready to finance your next property purchase, banks and licensed moneylenders offer bridging loans specifically to help people like you access the financing you need. This article will examine how a bridge loan works and everything you need to know.

What is a Bridging Loan or Temporary Bridging Loan Programme?

Simply put, a bridging loan is a bridging finance solution aimed at Singaporeans who are “between homes” and need a short-term loan to finance the down payment on their new property quickly before their existing home (or old property) sells.

It’s only too common here in Singapore that the property transaction process involved in selling a property takes longer than expected to reach completion, leaving home-movers in a precarious position. 

How Do Bridging Loans Work?

Once your bridging loan is approved, the bank you are borrowing from will handle the financing required to purchase your new property. They will also take over your existing mortgage.

From here, you’ll usually be expected to make monthly repayments on your bridging loan, which will ordinarily be interest-only, over a period of around six months. Ultimately, you’ll be paying off what is known as peak debt – which is made up of the purchase price of your new home, your loan balance on your existing home, stamp duty, legal fees, and any capitalized interest payable until your existing home is sold, if you are taking out a capitalized interest bridging loan.

This peak debt is converted into “end debt” once your old property or old house sells. From this point onwards, your bridge loan is effectively treated much like ordinary home loans, i.e., as if it were a standard mortgage or home loan.

 

Alternative to Banks: Bridging Loan from Licensed Moneylenders

While taking out a bridging loan from a bank can be an extremely efficient way of getting your hands on the financing you need to move homes fast, there is an alternative you might wish to consider instead: getting a short term loan from a licensed moneylender.

Borrowing from a licensed moneylender comes with a number of great benefits over taking out a bridge loan with a traditional bank. For example, standard moneylender loans can usually be taken out on an unsecured basis, meaning you won’t have to pledge your existing home as collateral. What’s more, short-term moneylender loan applications don’t always require the borrower to have a good credit score, making them a great option for borrowers with no credit.

At the time of writing, the Ministry of Law in Singapore has mandated a maximum interest rate of 4% – meaning you’ll pay reasonable rates, too. Use Instant Loan to compare the best moneylender loans currently on the market.

Pros and Cons of Bridging Loans

Bridging Loan Pros

  • Fast Approval

Bridging loans typically offer faster approval times than other types of short-term financing, with cash typically available in 24-48 hours. In some cases, licensed moneylenders grant loans within an hour.

  • Generous Loan Amount

The maximum amount you can borrow with a bridging loan is usually higher, too, as the loan is secured against your property, which will need to be pledged as collateral.

  • Lots of Flexibility

With fixed and variable interest rates available, as well as open and closed loan terms, bridging loans are super-flexible.

Bridging Loan Cons

  • Relatively High Risk

Perhaps the biggest downside of bridging loans is that their secured nature means you could lose your property if you default on your loan repayments.

  • Higher Interest Rates than other Short-Term Loan Options

You are likely to pay a higher interest rate with a bridging loan than with other short-term financing types or financial products. Also, capitalized interest and additional interest are calculated monthly with bridge loans, not annually.

  • Fees and Charges

Exit fees, arrangement fees, and other expenses that you may need to pay or repay can sometimes prove expensive with bridge loans.

hand to hand passing money

Is a Bridging Loan the Same as a Mortgage?

Bridge loans do effectively become traditional home loans once your current home sells and your peak debt becomes “end debt”. In short, you cannot use bridge loans in the same way you would with a classic home loan or mortgage from the outset, but a bridge loan will essentially revert to a mortgage once it has completed its bridging loan work and served its primary “bridging” purpose.

Is a Bridging Loan a Good Idea? Here are 3 Important Considerations

Bridge loans are targeted at homebuyers who cannot afford the down-payment on their new property until their existing one sells, and the sales proceeds have fully cleared. If this sounds like you, there are some important questions you should ask yourself before you apply for a bridge loan, such as:

1. How Much Money Do I Already Have?

You should always consider how much “cash on hand” you have. If you’re taking a bridge loan to preserve rainy-day funds, rather than due to a lack of working capital, note that interest rates on CPF funds are usually lower than the typical bridge loan interest rate.

2. Can I Manage the Costs?

Bridge loans usually require you to repay them within a short period – usually of six months or less. Consider whether loan repayment costs are affordable for you, whether you’ll be able to make the monthly repayments and interest, and don’t forget to factor in other expenses, too.

3. What is My “Plan B?”

It’s always wise to prepare for a potential worst-case scenario. Double-check the exit clauses of bridge loans and make sure you can manage the penalties, fees, and other costs if things go south.

How Can Bridging Loans Be Used to Reduce My LTV Ratio?

Bridge loans can be used to lower your loan-to-value (LTV) ratio when purchasing a new property, but how, exactly? Let’s say you are purchasing a $1,000,000 new property with a loan quantum of $750,000 or 75% LTV. Your old home is due to bring in sales proceeds of $500,000 and you intend to make a non-cash down-payment of $200,000.

In this scenario, if you are yet to receive your $500,000 sale proceeds, you have two options:

Option 1 – Take out a full $750,000 (75% LTV) home loan, wait until your prepayment penalty period ends and repay $300,000 as a lump sum.

Option 2 – Take out a larger bridging loan (e.g., of $500,000 rather than $200,000), and a smaller home loan or mortgage (e.g., $450,000) with a lower LTV (e.g, 45%). Once your sales proceeds from your old property clear, you can repay your bridge loan and a portion of your mortgage – though you will attract higher interest rates.

How to Apply for a Bridging Loan – A Five-Step Guide

1. Use Instant Loan to Compare the Market

If you’re looking for a bridge loan, Instant Loan’s quick and easy loan comparison service can help you compare up to three loan quotes from licensed moneylenders for free.

2. Find Your Perfect Bridging Loan

Once you’ve had a look at what’s out there, think carefully about your financial needs and goals and select the product that best suits you.

3. Ensure You Meet the Eligibility Criteria

You’ll need to be a Singapore Citizen, Permanent Resident, or foreigner in the process of selling property and have a good credit score before you can apply.

4. Submit Your Bridging Loan Application

Now it’s time to send your application to the bank or moneylender that best meets your needs.

5. Receive Your Bridge Loan Finance

Depending on the bank or money lender you choose, you should be able to receive your bridge loan funds within 24-48 hours.

Typical Bridging Loan Fees – Banks Vs. Licensed Moneylenders

Let’s take a look at how banks and moneylenders typically compare when it comes to bridging loan fees: 

Interest Rate Product / Arrangement Fees Late Payment Fees Exit Fees Repayment Period

Bank bridge loan 

Approx. 5-6% p.a.

Decided by bank 3-5% (15-day grace period usually applies) 1% of total loan amount

Up to six months

Moneylender bridge loan

1-4%

10% of the loan amount or less $60 per month for each month of late payment Decided by moneylender Decided by moneylender

When Should I Get a Bridging Loan? Best Capitalised Interest Bridging Loan Scenarios Explained

Your key motivation for taking out a bridge loan should primarily be to plug the finance gap between an old house sale and a new house purchase. That said, bridge loans can be beneficial for other purposes, too. Here are two bridging loan scenario types which may appeal to you:

You Require a 100% Loan on Your New Property

If you need a high loan-to-value to fund the purchase price of your new house, a bridge loan is a great option, as you can usually borrow up to 100% of the purchase price plus other expenses or costs. 

You Want to Enjoy Capitalisation of Interest

Bridge loan offers capitalization of interest, which can offer some often much-needed breathing space to people who invest in different property types. This is especially true if you have a limited servicing capacity or are struggling to repay loans or monthly repayments on more than one property simultaneously.

Conclusion – When You Should Consider Getting a Bridging Loan

Bridging loans offer ample opportunities to home-movers and property investors who are experiencing delays or difficulties in securing the sales proceeds from their old property in time for their big move. But there are a few things you’ll want to keep in mind before going out and applying for a bridge loan:

Key Takeaways

  • Bridging loans and mortgages are not quite the same – a bridge loan is designed for the specific purpose of bridging the gap between two properties
  • You’ll need to be able to finance loan repayments monthly over a period of around six months.
  • Certain product fees, exit fees, and other charges may apply – so you’ll need to make sure these are affordable for you.

Need a loan? With the help of a loan comparison site like Instant Loan, you can get quick loan quotes from the top three licensed moneylenders free of charge. Talk to us today, and we’ll help you find the best loan package suitable to your needs.

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