What Exactly Is A Bridging Loan In Singapore – All You Need To Know
July 19, 2022
As time goes on, most of us will live in more than one property. We start off living with our parents. After we get married or become financially strong, we may purchase a BTO or a resale HDB. Next, we may purchase a larger HDB unit or upgrade to a private property as we welcome new family members.
Bridging loans come in when we need to upgrade our property.
A bridging loan can be an excellent option for those who need money to fill in the gap when upgrading their property. This type of loan is designed to help you bridge the gap between two property transactions. If you’re selling your home and need to buy a new one, a bridging loan can provide you with the funds you need until your old property sells.
Keep reading the article below to learn more about what a bridging loan is. Please do not be confused with a Temporary Bridging Loan Programme (TBPL) which is designed for businesses.
What Is a Bridging Loan?
The bridging loan meaning is easy to derive by breaking it down into the two concepts that compose it. Therefore, it is a type of short-term finance used to ‘bridge’ the gap between two financial transactions.
As we mentioned in the intro, a bridging loan in Singapore covers the cost of your new property while you wait for your old property’s sale to finalise. However, they typically come with high interest rates and should only be used as a short-term solution.
Example of a bridging loan:
Assuming you’re looking to purchase a $1,200,000 apartment, a bridge loan can help if you don’t have enough funds for the downpayment. The maximum amount of bank loan you can take is 75%, which is $900,000. If you’ve taken a bank loan covering 75% of your home’s value, you must put down a non-cash downpayment of 20%, which is $240,000.
In most cases, you won’t have $240,000 cash on hand. To buy this new $1.2 million property, you’ve sold your previous HDB for $500,000. While you wait for the proceeds from your previous property to come in, how will you make payment for the downpayment?
This is where a bridging loan comes in.
With a bridging loan, you can borrow the additional $240,000 needed for the downpayment. A bridging loan interest rate is usually higher than a regular home loan, reaching 5-6%. Remember to factor that into your calculations.
In conclusion, a bridging loan can be helpful if you want to purchase a property but is waiting for the money from the sale of your previous property. Just be sure to consider the interest rate carefully before taking out a loan.
How Much Can I Borrow with a Bridging Loan?
Most Singaporeans use bridging loans to pay the 20% CPF & cash part of the required advance on a new home. That means your bridge loan may be limited to this sum. The keyword here is “may”.
The bank can also decide to lend you the entire net sum you need for purchasing the second apartment. For example, if you’re selling a $1M apartment to buy a $750,000 one, the bank can easily decide this.
However, they’ll require proof that the sale will go through. Here are other variables to remember:
- Bridging loans are short-term, with a maximum of six months tenures.
- You can get a bridging loan regardless of the type of property you’re buying or selling.
- The interest loan is payable only during the tenure.
- Once your sales proceeds go through, you must repay the entire loan.
How Will a Bridging Loan Lower My LTV Ratio?
Let’s consider the example above:
- You’re purchasing a new apartment worth $1,200,000.
- The maximum amount you get from a bank is 75%, meaning $900,000.
- The non-cash downpayment is $240,000.
At the same time, let’s say the apartment you’re selling gets you sales proceeds worth $500,000. This money isn’t in your bank account yet, but you still have to pay the person selling you your new apartment. In this case, you can take a bridging loan for the non-cash advance payment.
Should I Take a Bridging Loan in Singapore?
The main point of a bridging loan is to cover the downpayment of a new property. But, there are other reasons that you can take a bridging loan for.
1. Selling newly renovated properties
Perhaps you have decided to renovate your home completely, hack away some walls and refurnish the entire flooring. In this case, your renovation costs might have depleted your savings and you will need a bridging loan for your downpayment. However, rather than using your savings for your home renovation, you can consider applying for a renovation loan as well. Find the best renovation rates here.
2. En bloc sale
The Singapore government does have certain en bloc projects to redevelop certain areas. For example, one of the most recent en bloc redevelopment project is at Blk 562 to 565, Ang Mo Kio Avenue 3.
If you’re part of an en bloc sale, you will only receive the sales proceeds once the entire sale process is completed, which could take up to two years. When your HDB falls into an en bloc sale, you will definitely need a new property as soon as possible. To help speed up the property securement, a bridging loan can help. The good thing is that en bloc sales are usually qutie profitable. It may cover the costs of a bridging loan.
3. Upgrading your home.
Bridging loans can help you upgrade your HDB. However, remember to do thorough research before committing to a loan.
4. Preserve your savings
You might also want to take a bridging loan to preserve your cash savings. You might need this cash for an emergency or other investments.
Of course, you should only consider this option if you’re comfortable with the additional interest costs.
Can I Use My CPF to Pay for a Bridging Loan?
This solution is arguably better than a bridging loan because the interest is lower. However, you would need enough CPF savings for the downpayment, which might not be the case.
Total Costs Involved (in the Worst Case Scenario)
You should also consider the total costs of a bridging loan in Singapore. Let’s say you take a $100,000 bridging loan with a 6% p.a. interest rate and a 6-month tenure. The total cost you’ll have to repay is $103,000. The extra $3,000 doesn’t seem like much.
The real problem arises if your first apartment’s purchase falls through. In this case, you’re left with the loan to repay, and you would have also lost your initial downpayment.
Make sure that you have a Plan B in place in case the sale of your property falls through. For example, you could consider renting your old property instead of selling it.
Where Can I Apply for the Best Bridging Loans in Singapore?
At the end of the day, whether or not you should take up a bridging loan in Singapore depends on your circumstances. If you are confident that you will be able to sell your old property quickly and repay the bridging loan within the stipulated period, then it might be a good solution.
You should compare different bridging loans in Singapore and apply for one that best suits your needs.
Use a financial platform that offers a wide range of products and services to help you manage your finances better. Get personalised advice on the best financial products for your needs.
Some banks in Singapore offering bridging loans include:
Still Confused? Let us Help!
A bridging loan in Singapore is a short-term loan that helps you finance the purchase of a new property before the sale of your old property is completed.
This type of loan can be a good solution if you’re part of an en bloc sale or want to preserve your cash savings. However, you should only consider this option if you’re comfortable with the additional interest costs. Otherwise, using your CPF might be a better solution because of the lower interest.
To get more information on property and loans in Singapore, speak to us at Credit Thirty3. Our experienced finance assistants will be happy to help you.