How A Bridging Loan Works And How To Apply For One
January 18, 2023
After a long search for several months, you find a perfect property at a good price, and you would like to grab it before someone else does.
But what will you do if you haven’t sold the property you own? A solution to this is to seek a bridging loan. It can be hard to complete all the transactions concurrently when purchasing a new home while selling another.
This is where a bridging loan could come in handy. If you opt for a bridging loan, you can do so from banks or licensed money lenders.
Before you do so, make sure you know how bridging loan works, which we will explain in this article.
How Bridging Loan Works
A bridging loan is a unique type of short-term loan used for covering the purchase price of your second property while giving you time to sell your current home, regardless of your existing mortgage.
It fundamentally offers a financial bridge, allowing you to cover the gap between buying and selling.
Although bridging loans can be helpful when transitioning from your old home to a new one, they can be risky.
You are normally given between six to 12 months to sell your existing home until the bridging loan repayment is required from you.
With this in mind, you have to know about certain market conditions that will be beneficial to you, such as factors that make it easy to sell and good market conditions. Purchasing a new property before selling the old one is a perfect example of how bridging loan works. It provides cash to build a new home while you are still living in and trying to sell the old one.
Bridging Loan Interest Rate
The bridging loan interest rate usually comes with a higher percentage than other loans. You will be charged higher interest rates when you exceed the loan tenure. Banks will charge rates between 5-6% per year. Some lenders even charge more than 7%.
Licensed money lenders offer the loan at 4% per month, which must be completed as soon as the sales are complete. If you sell your property early, you will pay low interest rates.
How A Bridging Loan Can Lower Your LTV Ratio
Before a lender approves your mortgage, it must consider a metric known as loan-to-value (LTV) ratio.
You are required to pay full amounts when purchasing a property. So your LTV ratio is the percentage of the total cost you will pay.
Most lenders prefer a low LTV ratio as it represents less risk for them. The higher the LTV ratio, the more risk they take on.
Hence, to reduce the LTV ratio, a bridging loan is a good alternative when purchasing a property. It offers the advantage of borrowing less from money lenders.
When To Apply For A Bridging Loan
A bridging loan Singapore is a short-term solution for situations that need immediate working capital.
As mentioned above, it can be used to cover the downpayment of your new property while selling your existing home. But there are other times when a bridging loan is necessary; these include:
- When selling a recently renovated home, the renovation costs may have exhausted your cash reserves, necessitating a bridging loan application. However, an option to this is a renovation loan, which could be cheaper and preserve your cash reserves.
- A bridging loan is necessary during an en bloc sale. If you are fortunate to have such a sale, you may opt to get a new house fast. This is where a bridging loan comes in aid. And since en bloc sales are high-paying deals, the high interest rates will not be an issue.
- But if you are short on cash but want to upgrade to a new home, you can apply for a bridging loan when moving from a HDB house to private property because of the high downpayment. However, this does not indicate a bridging loan is meant for private property buyers. A HDB bridging loan can be used for those who want to upgrade their property.
Factors To Consider Before Applying For A Bridging Loan
A normal bridging loan can cover up to 25% of your property purchase. But since you have the option to borrow such an amount, it doesn’t mean it is necessary.
Because of the high interest rates and the short time offered, you should borrow only the amount needed.
As mentioned above, bridging loans are expensive because they have high interest rates.
Banks usually offer rates of 5-6% per annum. However, depending on the lender, you have a choice of paying off the interest first.
From here, you can pay for the bridging loan amount once you get the sales proceeds on your previous home. Licensed money holders charge no more than 4% interest every month. This rate applies regardless of your annual income and whether your loan is secured or not.
A bridging loan has risks just like any other loan. Mostly, your property will act as collateral when applying for this loan. So your property is at risk if you don’t repay the loan.
You will also acquire a huge property loan before receiving the sales proceeds of the old home.
So it is crucial to consider that bridging loans take a short time and have high interest rates before applying.
Before taking out a bridging loan, you should check if you have enough savings in case you won’t be able to pay the monthly installments. Also, check if you can cover the repayments together with the mortgage of the new property.
The loan period varies depending on the bank or money lender. However, you are normally given six months by banks.
Therefore, you need to carefully assess how much you should borrow.
How To Apply for A Bridging Loan
You can talk to your bank if you need a bridging loan. There are various things your lender should check when deciding whether to approve the loan or not.
Visit your lender and talk to them about the loan. A licensed money lender should provide an easy application process as they have staff who can help. It can check all available packages in the market and recommend which is appropriate for you.
The lender will then conduct an assessment to verify your creditworthiness. You will then await approval. If your loan is approved, your loan will be disbursed.
Lenders That Offer Bridging Loans
Bridging loans are a good way to access money quickly. They help in various property deals when one can’t access other borrowing options.
However, not all lenders offer this type of financing. It is recommended that you familiarise yourself with lenders in Singapore that are allowed to offer them before you proceed.
You should assess all Singapore bridging loans and compare them before making transactions with any lender.
For money lenders, they must get a license from the Ministry of Law in Singapore to be allowed to run their business. You should check the Registry of Moneylenders website to get the list of lenders that operate legally in Singapore.
Check the list regularly because the Ministry updates it monthly to ensure money lenders who meet their requirements stay on the list.
If you get a lender that conducts its transactions through text messages or phone calls, you are likely dealing with an illegal lender or a licensed lender breaking moneylending rules set by the Ministry of Law.
Visit the lender, seek clarification, and check for any red flags. You need to understand the terms and requirements of a licensed money lender before signing the contract.
Cut off communication with any lender that you find is operating against the law. Also, licensed lenders offer far lower rates than those operating illegally.
If you are considering purchasing another home before receiving proceeds from the sale of your first home, and you have always maintained a good mortgage, you may think this makes you an appropriate candidate for a bridge loan.
The bridge loan process might differ from applying for a mortgage loan. The loan is not available for every individual. There are important factors to consider such as your credit score, low debt-to-income, credit history, and the loan-to-value ratio.
It would help if you had enough equity in your current home to be eligible. Lenders will also check your debt-to-income ratio, the cash you spend every month, considering current debts like existing mortgage compared with your income.
You will also be eligible for this loan if you have a good credit score and history. Although the minimum score varies by lender, you will have a lower interest rate if you have a high credit score.
To qualify for this loan in most banks and money lenders, some banks need you to be at least 21 years. You should be a Singapore citizen or a permanent resident to be eligible. If you are a foreigner, you should be in the process of selling your property. You must also have proof that you own the property you are selling.
When applying, you should submit the following documents:
- Your recent Income Tax Notice of Assessment
- Financial statements as required by your lender
- At least six months’ bank statements
- Copy of your NRIC
- Proof of employment
- Option to Purchase (OTP)
Fees and Charges
Some arrangements and exit fees you must pay can sometimes be expensive. Different money lenders and banks charge varied late payment fees. Banks normally range from 3-5%.
Licensed money lenders are allowed to charge an interest rate of up to 4% every month the loan is repaid late. Also, they can charge a late repayment fee of up to $60 per month. When the loan is granted, they can charge up to 10% of the principal amount as a processing fee.
A Bridging Loan Can Be Useful
When it comes to bridging loans, most people will go to banks to acquire loans, and others to money lenders for faster processing and approval.
Now that you know how bridging loan works, Credit Thirty3 can help you secure the funds you need.