Are you thinking of buying another property but don’t have cash for a down payment?
In such situations, you usually get a home loan to finance your next property purchase. But there is another type of home loan that will help you overcome the temporary cash crunch. It is known as the bridging loan.
Bridging loans in Singapore can help you bridge the monetary gap between selling your old home and buying a new one. Typically, the interest rate ranges between 5% to 6% p.a.. You can use this type of home loan to pay for the downpayment of your next property purchase and other related expenses. Here we’ll talk about the typical bridging loan interest rates, its features, and its pros and cons.
What Is a Bridging Loan and How Does It Work
A bridging loan is a short-term loan that is secured by your old property. It helps finance the downpayment of a new property while you’re waiting for your old property to be sold. You usually have six months to sell an old property or a year if you’re constructing a new home.
So how does a bridging loan work?
Say you own an HDB flat with an estimated value of $500,000 but you want to upgrade your property. To replace your flat, you’re looking into a property worth $1 million. Unfortunately, the property is available for sale for a short period and someone else might end up buying it.
| Financing a S$1,000,000 property purchase: | |
| 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$750,000 |
Source: POSB
For this example, let’s assume you have paid the initial 5% downpayment in cash. But what if you don’t have enough cash on hand for the remaining 20% downpayment? On top of that, your home loan is still pending approval.
Unless you have $200,000 lying around, this is where you can get a bridging loan.
With a bridging loan, you can borrow up to 25% of the new property’s purchase price. That said, you can loan a maximum of $250,000 to “bridge” the financial gap until you receive the sales proceeds from your old house.
Is this the same as the Temporary Bridging Loan Programme?
This article focuses on property bridging loans which helps homeowners pay for the downpayment of a new home while they wait for the sales proceeds of their old property. This type of loan is different from the Temporary Bridging Loan Program (TBLP) which helps SMEs access working capital. With the TBLP, eligible SMEs can borrow up to $3 million with an interest capped at 5% per year.
Features of Bridging Loans
| Maximum Amount | You can borrow up to 25% of the purchase price of the new property. It is also limited by the net proceeds and CPF balance from the approved sale of your own property. |
| Maximum Tenure | It must be settled within 6 months |
| Interest Rates | The interest rates will depend on the bank and it is usually higher than personal loans. The bridging loan interest rate usually ranges between 5% and 6% p.a. |
Depending on your loan structure, most bridging loans are repayable in full at the end of the term. Unlike other types of loans, the monthly interest is often rolled into the loan. This means you don’t have to make a monthly loan repayment throughout the period.
Additionally, the loan application process takes less than 14 days. Lastly, bridging loans can be used for several reasons:
- Purchasing a new house quickly, like auction purchases
- Funding property restoration
- Buying a property under market value
Top Bridging Loan Packages Being Offered By Banking Giants
Most banks that offer home loans are more likely to also offer bridging loans. That said, you’ll need to get a bridging loan from the same bank where you got your mortgage. In Singapore, the top three banks offer bridging loans as a supplement for home loans.
Looking for the best bridging loan plans? Here are a few you can consider:
| DBS Bridging Loan | Standard Chartered’s HDB Bridging Loan | UOB HDB Home Loan | |
| Bridging Loan Interest Rate | Pegged to Prime rate | 3M Sibor + 2% p.a. | 4% to 5% |
| Maximum Loan Tenure | Up to 6 months | Up to 6 months | Up to 6 months |
| Property Type | All property types | HDB | HDB |
Pros and Cons of Bridging Loans
A bridging loan may be the answer to your current cash crunch. It allows you to pay for the downpayment of a new property while you wait for the sales proceeds of your current home. What could possibly go wrong?
Before you start applying for a bridging loan, it’s crucial to first weigh the pros and cons.
Pros:
- Fast application process – under 14 days. However, this could vary from bank to bank and may depend on the current stage of your home loan approval process.
- It allows you to buy a new home while your current home is on the market. You don’t have to wait for your property to be sold before getting the cash you need.
- Depending on your loan structure, you might gain a few months free of payments. Some banks may require you to make repayments after the bridging period.
- Since you don’t have to make monthly repayments, a bridging loan can also be used to raise your funds.
- It allows you to purchase new property straight away. Additionally, if you’re granted a bridging loan, you may be able to avoid the excess cost of renting in the period between the sale of your existing property and the settlement of your new home.
Cons:
- A bridging loan is usually more expensive than a home equity loan. Traditional home loans are still a very economical loan option when buying property.
- Tthe interest rate is usually charged monthly. So if you’re unable to sell your property, interest will start piling up.
- If you fail to sell your property at the required time, you may face hefty interest or risk having the bank step in to sell your home.
- If you end up selling your current property at a lesser price, you may end up paying a larger loan amount which can lead to financial strain.
- Handling two loans at the same time – your current and new home, plus the bridge loan can be stressful.
- Short loan tenure of up to 6 months.
- You must be eligible to own two homes.
- If you already got a home loan from a different bank that doesn’t offer a bridging loan, you’ll need to make the switch. This means you’ll have to pay a loan termination fee from your current mortgage.
Factors to Consider When Choosing A Bridging Loan
1. Loan Amount
A typical bridging loan finances only up to 25% of your new property’s purchase price. Additionally, bridge loans have a high interest rate as well as a short loan period. Taking all these factors into consideration, it’s best to borrow only the amount you need.
Say if you need to make a downpayment of $200,000, then borrow only that amount – even if you can borrow a maximum of $350,000 bridging loan.
2. Bridging Loan Interest Rate
Bridging loans are known for their high interest rates. Typically, it can range between 5% to 6% p.a. However, depending on the bank you work with, you may have the option to pay off the interest first then the bridging loan once you’ve received the sales proceeds of your current home.
That said, before applying for a bridging loan, compare the interest rates of different financing companies first. Additionally, take note of applicable fees and charges. Some lenders may offer low interest rates but have other charges that can increase the total cost of the loan. Checking 2-3 providers will help you find the best deal.
3. Monthly Repayments
The biggest risk of taking out a bridging loan is failing to repay the loan at the end of the term. That said, you must take the time and look at your finances. Remember, you’ll have to make repayments on top of your mortgage.
Here are a few things to consider:
- Is it possible to take up a bridging loan?
- Do you have sufficient savings in case your income comes to a standstill?
- What if your current property will not be sold on time?
4. Loan Tenure
As previously mentioned, bridging loans are short-term loans. Usually, you have up to 6 months to repay the loan. However, the loan period will depend on the bank you’re working with. Here are a few things to take into account:
- Your loan amount and the interest rate. Although bridging loans have short tenures, it can still rack up significant monthly loan repayments.
- Ask your lender for any pre-payment charges in case you want to repay the loan early.
- Additionally, ask about late fees in case you fail to repay on the due date.
5. Total Cost
Lastly, consider the total cost of the loan. Don’t just look at the interest rate.
Most borrowers prefer the lowest interest rates but fail to consider the additional fees and charges. For instance, some financial institutions may charge large exit fees and other hidden costs.
That said, it’s best to ask for a breakdown of the total cost of the loan. Compare two to three providers to get the best deals.
Conclusion
Is it wise to take out a bridging loan?
If you need quick cash to pay for downpayment, then a bridging loan is a feasible option. However, you need to think about your capacity to pay back the loan within a short period. Here are a few key takeaways:
- Bridging loans allow you to close the deal on a new property before you can sell your existing home.
- Additionally, a bridging loan typically has a fast application and approval process.
- This type of short-term loan usually has higher interest rates than traditional mortgages – around 5% to 6% p.a..
- You need to sell your property within a set period or else, you’ll risk paying a hefty interest or risk having the bank step in to sell your home.
Take your time to compare different providers. The difference in total loan costs can be significant. Compare at least two or three providers. Loan Advisor is a one-stop loan comparison directory that compares top licensed moneylenders in Singapore. You can get free quotes for their bridging loan comparison service to secure the best possible deal.
