For some existing homeowners, a time will come when a property upgrade becomes a necessity. For example, when you get married, you may choose to buy an HDB BTO flat. However, as your family grows, you may need to sell your HDB flat and buy a more spacious home.
Unfortunately, selling your existing property is harder than buying your new one. If your funds are tied to your existing property and need help financing your next property purchase, a bridging loan is an excellent option.
This loan will help make up for the shortfall, especially if it involves a large sum of payment. Interest rates for bridging loans vary depending on the bank but generally range from 5% to 6% per annum.
What Is a Bridging Loan?
A bridging loan is a type of short-term loan – usually 12 months or less, that provides borrowers with an immediate cash boost to clear necessary payments for the new and/or existing property. Take out this loan if you are in the process of selling your old property for an upgrade or a downgrade.
Here are the basic features of bridging loans in Singapore:
| Bridging Loan | |
|---|---|
|
Maximum Loan Amount |
Depends on the property sale value. Typically 20% of the existing property value |
|
Maximum Tenure |
You usually have up to 6 months to repay the loan |
|
Interest Rate |
Typically range from 5% to 6% p.a. |
Do not confuse a bridging loan from the Temporary Bridging Loan Programme (TBLP). The latter is a government-assisted financing scheme that provides access to working capital for business needs.
Are there different kinds of bridging loans in Singapore?
- Capitalised Interest Bridging Loan: Repayment for this type of bridging loan will commence only after you receive the sales proceeds of your old property. Interest will accrue throughout your bridging loan. Plus, you will cover the entire principal amount and resulting interest.
- Simultaneous Repayment Bridging Loan: With this type of loan, you will make repayments on both your new home and bridging loan simultaneously. You typically have 12 months, during which you have to sell your old property and repay the loan.
These types of loans are available when you take out a bridging loan from banks. That said, do your own due diligence and research the policies of the bank for home loans and bridging loans.
These types of bridging loans do not apply to licensed money lenders in Singapore.
To further explain how it works, here’s a bridging loan scenario:
Let’s assume that you are selling your existing property to purchase a new condominium worth S$1,000,000. However, your sales proceeds will be available after 5 months.
|
Down payment (5% cash) |
5% x S$1,000,000 = S$50,000 |
|
Down payment (20% cash and/or CPF funds) |
20% x S$1,000,000 = S$200,000 |
|
Loan amount (Assuming you qualify for maximum 75% Loan-to-Value) |
75% x S$1,000,000 = S$750,00 |
Say you have enough cash to pay the initial 5% down payment. However, you don’t have enough savings or CPF funds for the next 20% down payment since you’re still waiting for the sales proceeds of your existing property.
You can still proceed with the property purchase by taking up a bridging loan. The funds from this loan can help make up for the 20% shortfall.
When Does It Make Sense To Take a Bridging Loan?
With a bridging loan, you can purchase a new property without waiting for your old property to be sold. Here are other examples of when a bridging loan makes sense:
- Interest Capitalisation: A bridging loan with an interest capitalization feature can provide you with financial breathing space as you wait for the sale of your existing property.
- 100% loan on the new property: You can also borrow 100% of the purchase price of your new property. It becomes more affordable once you’ve sold your old property.
- Selling newly renovated property: You can take a bridging loan if your cash reserve was depleted by the renovation costs of your existing property.
Just like any type of loan, bridging loans can also be risky. It is best to examine your total debt servicing ratio (TDSR) and your employment stability before taking on bridging loans.
How Much Does a Bridge Loan Cost?
A bridging loan may have high interest rates of 5% to 6% but the tenure is short. As such, the total amount of interest you’ll pay is relatively small.
Let’s use our previous example wherein you’re buying S$1,000,000 worth of property and took out a bridging loan for the remaining 20% downpayment – S$200,000.
Assuming the bank charges a 6% interest rate and you have a 6-month tenure, the total interest incurred would be S$6,000.
What about other fees and charges?
The late payment fees will depend on your bank. Typically, it ranges from 3% to 5%. Aside from late fees, there may also be other miscellaneous fees you need to take into account.
Top Bridging Loans in Singapore
| DBS Bridging Loan | Standard Chartered’s HDB Bridging Loan | UOB HDB Home Loan | |
|---|---|---|---|
|
Interest rate |
Prime rate |
3-Months Sibor + 2% annual interest |
4% to 5% |
|
Tenure |
Up to 6 months |
Up to 6 months |
Up to 6 months |
|
Property type |
All property types |
HDB |
HDB |
Note: Typically, homeowners get a bridging loan from the same bank that is providing their current home loan.
All three banks listed on the table have competitive rates. However, DBS Bridging Loan may have an edge over the rest since it can be applied to all property types. Additionally, as of the time of writing the article, the interest rate is at 4.25% p.a. (prime rate) which is highly competitive against the two banks.
At a glance, Standard Chartered HDB Bridging Loan may be a good option with its lower interest rate compared to the other two banks. However, a 3-month SIBOR means your bridging loan rate is refreshed every three months. This makes it a bit unpredictable.
How To Choose the Best Bridging Loan?
Loan Amount
Typically, bridging loans finance only up to 25% of your new property’s purchase price. That said, it’s best to borrow only the amount you need to cover the downpayment to complete your property purchase.
Interest Rate
Banks offer bridging loans with higher interest rates than home loans. Interest rates typically range from 5% to 6% p.a. Depending on the bank, you can pay off the interest first and pay off the bridging loan when you receive your sales proceeds on your old property.
Monthly Repayments
The type of bridging loan – capitalized interest or simultaneous repayment methods, can affect your loan repayments. Can you take up a bridging loan and home loan simultaneously? Or will you be repaying the loan after your old property sells?
That said, before taking out a bridging loan, determine whether you can afford the repayments on top of the mortgage for your new property.
Loan Tenure
The loan tenure may vary depending on the bank. But since this is a short-term loan, you typically only have up to 6 months to repay the loan. Take your time in comparing interest rates since a short tenure can rack up monthly loan repayments significantly.
Risk Level
Bridging finance is a convenient option to make large sum payments in a short time. However, it can be risky.
For one, it uses your property as collateral. Secondly, you’re getting a loan before your old property is sold. Third, if the real estate market devalues your old property, you’ll need to use your savings or income to make up for the loss in sales proceeds.
That said, ask yourself if you are comfortable with this level of risk before you take out a bridging loan.
Applying for a Bridging Loan
Borrowing From Banks
The eligibility criteria and document requirements may vary depending on the bank you’re borrowing from. Here are some of the basic criteria to keep in mind.
Eligibility
- Between 21 to 65 years old
- Singapore Citizens, Permanent Residents, and Foreigners
- Buying another flat from the HDB resale market or directly from the HDB
- All owners of the flat sold must be the borrower
Requirements
- Option to Purchase (OTP) document
- CPF withdrawal statements
- Outstanding bank loan statements
Borrowing From Moneylenders
Eligibility
- At least 21 years old
- Must exercise the Option to Purchase (OTP)
- Minimum Income:
- Singaporeans or Permanent Residents: S$2,000
- Foreigners: S$3,000
Requirements
- A copy of your NRIC
- Copy of the OTP
- Proof of income and employment
- Proof of residence
- SingPass to log in to CPF, IRAS, and HDB websites
Closing
Upgrading your property is both an exciting and cumbersome process, especially when you find yourself short on funds. Thankfully, you can consider taking a bridging loan to pay off your home downpayment and close your property transaction. But before you do, make sure you’ve taken into account your needs and your capacity to repay the loan.
Key takeaways
- A bridging loan is an excellent option if your funds are tied to your existing property and need help financing your next property purchase.
- Interest rates for bridging loans vary depending on the bank but generally range from 5% to 6% per annum.
- Typically, bridging loans finance only up to 25% of your new property purchase price.
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