What Is A Bridging Loan And Should You Apply For It?
September 16, 2022
As we journey through life, our homes change to meet our evolving needs.
We may start in a modest apartment and then upgrade to a spacious house as our family grows. Or we may downsize after our children move out on their own.
For many of us, finding and buying a new home is exciting but also fraught with financial challenges.
Fortunately, a tool can help us make our dream home a reality: the bridging loan.
Whether you’re upgrading to a larger HDB unit or buying your first private property, a bridging loan in Singapore can provide the extra funds you need to make the purchase.
This article will serve as a guide to what is a bridging loan, as well as how to apply for a bridging loan in Singapore.
Keep reading to find out everything there is to know about what is a bridging loan.
By the way, the Singapore government’s Temporary Bridging Loan Programme (TBLP) has nothing to do with this article.
The TBLP is a government scheme for business loans and has a completely different structure.
What Is A Bridging Loan?
A bridging loan in Singapore is a short-term loan that helps you tide over a financial shortfall until you can secure long-term financing.
Let’s understand this with a simple example.
If you are selling your current home and buying a new one, you might be short on cash to make the downpayment for your new home.
A bridging loan can cover the downpayment for the new home until the sale of your current home is completed and the proceeds are received.
A bridging loan has a short-lived tenure of six months, and its interest rates are usually higher than that of conventional loans.
A bridging loan’s interest rate falls between 5-6% per annum.
Still, it can be a cost-effective way to finance your property upgrade.
If you are considering a bridging loan, be sure to compare different offers from different lenders to find the best deal for your needs.
How Much Can You Borrow With A Bridging Loan?
The amount you can borrow with a bridging loan depends on the value of your property.
Since you are supposed to borrow an amount for only your downpayment, you’re entitled to borrow 20% of the property value in most cases.
However, you may be eligible to borrow more from a bank or money lender if you can prove that you’ll have sufficient money from the sale proceeds.
Suppose you’re selling your current property for $1.25 million and buying a home worth $1 million. The downpayment for the new home will be $200,000.
You can use the proceeds from the sale of your current property to pay off the bridging loan and have $50,000 left over.
Since this is a profitable deal, it’s clear that you’ll have enough money to pay back the loan.
In such a case, most money lenders would be willing to go beyond the “supposed” 20% limit, given that you prove them three things:
- The sale proceeds are more than enough to cover the loan
- You earn a steady income (in case the deal doesn’t go through)
- Your credit score is excellent (some banks would require this)
How To Apply For A Bridging Loan
If you want a bridging loan in Singapore, there are two ways you can get it:
- You can either get a bank loan from HDB
- Or you can reach out to money lenders for HBD financing
Let’s understand the process for both.
All banks in Singapore usually have the same application process and requirements.
Here’s what you’ll need to do:
- Register with the bank.
- Talk to the bank’s representative about a bridging loan application.
- Access the bank’s online bridging loan portal.
- Upload the required documents.
- Finalise and submit the application.
That’s it – now you only have to wait for the bank’s response.
However, what might seem like a straightforward process on paper is actually a complex one with strict requirements.
This is where licensed money lenders prove to be a better option.
Applying for a bridging loan from a licensed money lender is much simpler, especially if you’re already a customer.
Here’s what you need to do:
- Reach out to your licensed money lender through email or phone.
- Fill up its application online.
- Submit the required documents listed on its website or after a call.
- Wait for the confirmation call or email and receive the loan amount in your account.
It’s that simple. There’s no need to go through a lengthy and complicated application process.
Money lenders usually have the following eligibility requirements:
- You must be at least 18 years of age (banks need you to be 21 at least)
- You must have valid citizenship or PR status
- You must be earning $1,500 per month ($2,000 if you’re a foreigner)
- You must have the Option to Purchase (OTP) from the seller of the property
Money lenders will ask you for the following documents:
- NRIC (for identity proof)
- Salary slips and employment letter as proof of income and employment
- Property documents as proof of residence
- Singpass to access CPF, IRAS, and HDB websites
- Copy of the OTP
In contrast to money lenders, banks would also require an excellent credit score and a few additional documents, making the process a little more complicated.
How To Use Bridging Loan To Lower Your LTV Ratio
The loan-to-value (LTV) ratio, or percentage of the property value, is critical for lenders.
They use this parameter to decide whether a loan should be approved and, if so, on what terms.
A higher LTV ratio puts lenders at high risk.
Why? The reason is simple.
If you (or any borrower) cannot repay the bridging loan, the lender could end up taking a loss on the property. No lender (either bank or money lender) would want that to happen.
So in order to have a strong loan application, you’ll need to have a low LTV ratio.
A lower LTV ratio is better for two reasons:
First, it shows that you have skin in the game (more equity in the property) and are, therefore, less likely to default on the loan.
Second, a lower LTV ratio may help you get better contract terms, including a better interest rate.
The ideal LTV ratio for most lenders is 80%. However, some lenders are willing to lend up to 90% if the borrower has a strong credit history and income.
If your LTV ratio is too high, there are a few things you can do to lower it:
- Make a bigger downpayment
- Get a less expensive home
- Get a home equity loan
Now, let’s see what options you have if things go south and you’re unable to repay the bridging loan.
Can You Use CPF To Cover Bridging Loans?
Let’s say you took a bridging loan from a bank or money lender for the downpayment, but your home-selling deal fell through and you’re now stuck with the loan.
How are you going to repay it?
Well, thankfully, you can use your Central Provident Fund (CPF) savings and refund them once you have sold your property.
But remember that you will have to pay an interest amount to the fund in cash.
So if you have enough CPF savings and can pay the interest amount on top of it, you can surely use your CPF to pay for your bridging loan.
What To Know About A Bridging Loan Before Applying
Here are a few things to keep in mind when considering a bridging loan:
Total Loan Amount
Remember, except for some unique cases, you will only be eligible for a limited bridging loan amount.
So don’t expect your money lender or the bank to pay for the full price of your new home. You’ll only be getting 20% of your new property’s price for the downpayment.
Be mindful of the interest rates when taking a bridging loan.
The interest rates on bridging loans are usually higher than that of conventional loans because they are considered higher risk.
The general range for bridge loan interests is 5-6% per annum of the loan amount.
Bridging loans are short-term loans, so you’ll need to be able to repay the loan within a few months.
The maximum tenure for bridging loans is six months. So make sure you’re able to close the selling deal of your first home within the six-month period to pay back the loan.
Total Cost Incurred
You might tend to think that the total cost of a bridging loan would be just the sum of the principal and interest amount.
However, there are other associated costs as well, such as:
- Interest repayments
- Administrative/processing fee
- Late fees or penalties (possible)
These fees could vary from bank to bank, but if you borrow from a licensed money lender, you can expect the following:
- No upfront fees
- Interest rate ranging from 5-6% per annum
- A maximum of 10% processing fee
- $60 for each late repayment
On the other hand, as mentioned earlier, you’ll also need a good credit score and a stable income to qualify for a bridging loan if you borrow from a bank.
So these are some things you need to know before getting a bridging loan to finance your new property purchase.
But are there any other options besides bridging loans?
Alternatives To Bridging Loans
If you’re not able to get a bridging loan or don’t want to take one, there are a few other options you can consider:
You can apply for a personal loan to finance your new property purchase.
Money lenders and banks usually offer personal loans at a lower interest rate than bridging loans.
Plus, the amounts can sometimes be enough to cover the downpayment.
For example, if you earn at least $20,000 per year, you’re eligible to get a personal loan totalling six times your monthly salary.
So the higher your salary, the higher the loan amount.
Temporary Loan Scheme
The Singapore government offers an excellent borrowing solution for flat buyers.
If you wish to use your existing flat’s sale proceeds to purchase your new flat without taking a home loan, the Temporary Loan Scheme (TLS) could be the answer to your prayers.
The concept is similar to a bridging loan, but the conditions differ.
You must have:
- Booked a flat with ready-for-collection keys
- Already redeemed your housing loan for the existing flat
- Applied to sell your first flat
- Enough CPF and sale proceeds to repay the TLS
Lastly, you can always take a home loan to finance your new property purchase.
You’ll have to choose from a few types of home loans, but all have interest rates lower than bridging loans.
These are some of the things you need to remember for a home loan:
- Your house will be treated as collateral
- You will need to have an excellent credit score
- You must have a decent, stable income
- The loan will be disbursed after you’ve made the downpayment
So these are some of your options if you want to steer clear of bridging loans.
However, bridging loans are incredibly helpful as they help you secure the down payment without selling your current home first.
Think Before You Apply For A Bridging Loan
With a bridging loan, you can have the best of both worlds: the home you want today and the flexibility to sell when the time is right.
Bridging loans are a great way to finance your property purchase, but it’s important to understand the process and requirements before applying.
Our seasoned team of financial experts will help you understand the process and requirements and guide you through the application process.
Or apply for a loan with us now.