From time to time, you may face situational financial challenges. Through these challenges, home loans can come in handy. Like any other credit plan, bridging lending gives you the coverage you need to run your essential operations smoothly.
A bridging loan is a short term loan that one can apply over their existing home loan. These mortgages are a good idea when you want to purchase a new property and are fixed in the middle of a current property sale.
Although there are many factors to consider when choosing bridging lending, the convenience of these overdrafts is unmatched. On the contrary, bridging credits have much higher interest rates than the usual property purchase price, which is a disadvantage.
How Do Bridging Loans Work?
As the name suggests, a bridging loan is meant to connect the space between selling your old property and your next property purchase. In Singapore, these short term loans are typically used by private property owners who want to upgrade to new property types but lack sufficient funds. Another option is to utilize personal loan to supplement your own funds.
Thankfully, the bridging loan allows you to borrow up to 15% of your new property buying price, with a tenure of up to 6 months. Most financial institutions that deal with personal loans, home loans, and residential property sales also provide bridging loans.
The bridging credits’ interest rates range between 5% and 6% per annum. As a private property owner, you can pay the interest during the tenure and repay the principal once you’ve received funds from your old property’s sales proceeds.
Most bridging mortgage packages in Singapore are meant to be fully repaid within six months. Your old property’s net proceeds and CPF balances limit the maximum credit amount.
Bridging Loans Interest Rate
Although the interest rate in these overdrafts are relatively high, the tenure is usually short. Therefore, after getting a bridging loan you may not incur a high interest. It’s also important to note that the maximum amount of bridging overdrafts solely depends on the property’s sale value, which is usually 20% of your next property’s price.
Example
For instance, let’s assume you’re looking forward to purchasing a property worth $1,500,000. Since you don’t have sufficient funds, you take a bridging credit for the full 20% net worth, which will sum up to $300,000. Assuming a 6-months tenure and a 6% interest, you will incur a total interest of $9,000, which is not as high as the property value.
These credits should be considered when one does not have enough cash to service a down repayment. Alternatively, you can use funds in your CPF, as the CPF fund’s rates of interest are much lower than that of any bridging loan.
Types of Bridging Loans
1. Simultaneous Repayment Bridging Loan
With this loan repayment plan, homeowners pay their interests monthly as they wait for the sale proceeds of their existing property.
In this repayment plan, the borrower is not required to pay anything by the end of the credit term because the property’s fixed value pays for the bridging credit principal.
2. Capitalised Interest Bridging Loan
In the Capitalized interest bridging loan plan, borrowers pay for the interest once they’ve sold their property. Unlike the Simultaneous payment plan, the capitalised interest bridging loan in Singapore allows you to save money as the bank’s fixed equity value pays for your principal.
The capitalised interest bridging loan plan results in higher interest.
Pros of Taking a Bridging Loan
Below are three major advantages of taking a bridging credit in Singapore:
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Fast Funding
It can be quite challenging waiting for months to get funds, especially when your operations are at a standstill. These loans are normally approved within a short time. Therefore, you can start your essential operations instantly once you apply for a bridging loan.
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Short Tenure
Thankfully, bridging debentures are paid within a short period of around one year. This way, you will not incur a financial weight over the coming years.
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Reasonable Repayment
You can choose to repay your mortgage in weekly or monthly installments. The flexible repayment plan offers you a suitable time frame depending on your financial situation.
Cons of Taking a Bridging Loan
On the contrary, bridging loans have the following cons:
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Shorter Loan Tenures
While other loans have longer repayment terms, bridging mortgages have shorter terms, meaning you have to pay off your loan quickly under a short time frame. If you do not have extra funds, you may be unable to repay your loan within the given period.
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Challenging to Obtain
In Singapore, some eligibility criteria enable you to qualify for a bridging loan. The banks must assess your credit score and financial history before evaluating your application. Bridging loans are challenging to obtain because you may not always meet the criteria.
Top 4 Bridging Loans in Singapore 2022
The following four banks offer bridging loans that are worth consideration.
| Bridging Loan | Interest Rate | Loan Tenure | Property Type |
|---|---|---|---|
| DBS Bridging Loan | Prime Rate | Up to 6 months | All Property Types |
| UOB HDB Home Loan | 4% – 5% | Up to 6 months | HDB |
| Maybank HDB Home Loan | 1.33% -1.60% | 1-4 years period | HDB |
| Standard Chartered’s HDB Bridging Loan | 3 months Sibor + 2% annual interest | Up to 6 months | HDB |
Temporary Bridging Loan Programme
All the above banks offer the Temporary Bridging Loan (TBL) program. TBL are the best mortgages with the lowest interests. It helps enterprises access working capital. As stated in the table above, different banks have different interest rates for other financial products.
The four banks listed above offer the temporary bridging loans in Singapore. This is the order in which they appear concerning offering low-interest rates.
- Maybank HDB home loan
- DBS bridging loan
- Standard Chartered’s HDB credit
- UOB HDB home loan.
Tips When Applying for the Best Singapore Bridging Loan
Like personal loans, home loans can drive one into deep debt due to missing payment periods. Therefore, before getting a bridging loan, there are tips that you should be familiar with.
1. Interest Rate
This is the foremost factor that any borrower should consider before applying for bridging lending. All financial products charge interest daily, and so do bridging loans. Banks estimate their interests per year.
Missing any agreed repayments leads to the accumulation of penalty fees, including compound interests. Bridging loans’ interest typically ranges between 5% to 6%. Mortgage repayments differ depending on different banks.
You can pay off your interest first and later on the bridging overdraft once you have acquired sales proceeds from the property deal. Knowing your rates of interest is crucial as it becomes easy to keep track of your repayment plan.
2. Monthly Repayments
When it comes to monthly repayments, you have to take your time and ask yourself if you can afford the repayments whether or not you have an income. Every borrower must have sufficient funds set aside in case their income comes to a standstill.
Your monthly repayment depends on your choice of bank. Most bridging finance products have regular monthly payments. However, properties with an above-average purchase price require higher and recurring payments, whereby your bank can help you raise capital.
Alternatively, you can use your savings to settle the bridging mortgage if your sales proceed delayed. This way, you will save yourself the high interest due to late sales of your old property.
3. Loan Tenure
All bridging finances have both short-term and long-term loans. Due to some reasons, you might not be able to sell your former property within a short period. Always note that banks will overcharge you whenever you exceed your credit term payment.
However, tempting to use a bridging credit for your next property, the loan tenure matters a lot. To avoid a high-interest bridging loan, always have another solution if you experience late sales proceeds.
Like a home loan, bridging loans are primarily short-term loans. Therefore, a brief tenure can affect monthly loan repayments significantly. Be well versed with the amount you are borrowing and the rates of interest. The tenure varies from bank to bank as they also have varying bridging loan packages.
4. Loan Amount
Always note that the essential bridging finances should finance only up to 20% of your new property’s purchase price since these mortgages do not fund the entire amount. It is wise to borrow the amount you need for your down payment to complete your property transaction.
Borrowing more than you need will give you financial losses, considering the high-interest rate and brief tenure. These advances are convenient for borrowers who prioritize property transactions before cost because banks may go against your property purchase plans.
Assume you want to sell your old property to purchase new property. However, your sales proceeds will take around ten months. You can borrow a bridging advance to cover the 20% down payment as you wait for the success of your sales proceeds.
Applying for a Bridging Loan
The bridging application process is straightforward. The process only requires you to have the proper documents and some other few items then the bank will give you various loan options pending approval.
Below is the procedure for applying for a bridging mortgage.
1. Banks
Eligibility
All Singapore citizens, foreigners, and permanent residents who wish to resell their property in Singapore are eligible for a bridging credit. To be eligible for a bridging loan, you should;
- At least be 21 years old
- Exercise the option to purchase
- Have a good credit score
Requirements
Some documents are required to start your bridging loan application process. You should provide:
- A copy of the Option to Purchase (OTP) document. This document states that you have all the rights to purchase your next property.
- Your CPF withdrawal and outstanding bank credit statements. These statements determine the proceeds that will be available for you
- Proof of income and employment
- Proof of residence
- The Singapore pass to log into CPF, IRAS and HDB websites
- NRIC
2. Licensed moneylenders (Alternative to banks’ bridging loan)
Apart from a bridging credit, licensed money lending institutions can provide borrowers with a maximum loan quantum of up to six times your monthly salary. Licensed moneylenders’ nominal interest rates are 4% per month.
Borrowers may prefer this option because:
- Quick approvals
- One can get unsecured loans
- Their credits are immediately accessible
- Moneylenders do not impose early repayment fees.
- All licensed moneylenders in Singapore have comprehensive regulations from the Ministry of Law and Registry of Moneylenders.
Eligibility
- One must be at least 21 years
- Residential borrowers should have a minimum monthly income of S$2,000, while non-residents should have a minimum monthly income of S$3,000.
Requirements
Borrowers require to submit a duly completed application form that states:
- The name
- Date of birth
- Personal identification number
- Nationality
- Telephone number
- Residential address
- Details of a corporate body if they are in any
- Details of partnership, if any.
Most Commonly Asked Questions and Their Answers
1. Can CPF pay a bridging loan?
Yes. You can pay your bridging loan using CPF. You can use those funds to repay your bridging loan if you sell your old property and get your CPF savings back. Your bank, however, will require you to service your interests with cash.
Does HDB provide a bridging loan?
HDB is among the banks offering bridging loans to borrowers by evaluating their property’s value. To qualify for a bridging loan with HDB, you will require to be:
- 21 years of age
- A Singapore citizen
- A permanent resident
- A foreigner is looking forward to selling their Singapore-owned property.
Additionally, you will require a recent 3-months pay slip, a copy of HDB’s Option To Purchase (OTP), proof of employment, proof of residence, and an Identity card.
2. Do banks need collateral for bridging Overdrafts?
Banks use your property as collateral. Banks need collateral because you are getting an overdraft before receiving the sales proceeds of your old property. Getting a bridging mortgage requires you to withstand a certain level of risk.
3. Should borrowers use capitalised interests or simultaneous payment bridging loans?
Whichever way you choose solely depends on your current financial state. If you have enterprise access, you can use the simultaneous repayment plan. This plan lets you pay your bridging lending quickly and incur a lower interest.
Alternatively, you may lack working capital and use the capitalized payment plan. This way, you will pay a higher interest rate but have a longer tenure.
See also: Personal loan Vs. Bridging loan, which should you choose?
Conclusion
Bridging lending helps you pay for the down payment of your property as you wait for the sale proceeds from your existing property. Many financial institutions offer bridging loans with equitable interests in Singapore as of 2022.
Key Takeaways
- Borrowers should consider bridging credit as an option only when looking for a temporary financial solution.
- The maximum interest rate referred to in the Singapore Moneylenders Rules 2009 is 4% per month. The interest is computed based on each month’s outstanding balance.
- Bridging finance has its respective risk levels, and you may have your property devalued. As a borrower, analyze all the possible risks before opting for bridging finance.
You do not have to price your old property lower than it is worth due to financial pressure. You can apply for a bridging overdraft and take time to find the rightful buyer. Visit our website to compare your options and request up to three loan quotes from licensed moneylenders’ best bridging loans.
