A bridging loan is a short-term loan offered by a bank to help people complete the purchase of a new home before receiving the proceeds from selling their existing home. Bridging loans are generally more expensive than conventional financing - so as to compensate for the additional risk involved. Bridging loans are usually backed by some sort of collateral - like real estate - to minimise the bank’s risk. This means that the bank could seize your asset in case you don’t make the monthly payments. Thus, it is a secured loan. In Singapore, bridging loans are available for the purchase of private and commercial properties.
If you have shortlisted a new property and are unable to purchase it because you’re still waiting to get funds from selling your existing home, a bridging loan can help by offering you immediate cash. They are usually approved much faster than a personal loan. This way you do not have to wait to purchase the new home or feel hard-pressed to sell your existing home quickly in fear of losing the new home. Once you get a bridging loan approved, you will have up to 6 months to sell your current property and repay the loan amount.
This facility does come at a cost though. Bridging loans have higher interest rates, are only available for less than a year, and come with steep origination fees. However, in most cases, these loans do not incur repayment penalties should you pay back your loan before the end of its term.
When you need to make a property purchase where time is of the essence
Since such loans can be arranged quickly, you can compete with other buyers by paying in cash and steal a good deal on a new home from right under their noses. Some sellers are even willing to sell a property at a discount if you are able to complete certain formalities faster than a mortgage would let you. Thus, a bridging loan might be just the tool you need to complete a deal quicker and get the house you’ve got your eyes on.
When you want to flip a property
A mortgage is intended to be held for over 20 years on average, so it is not a sensible option when you’re looking to finance the flipping of property, which is a short-term investment. Using a bridging loan could be a useful option as it is a short-term loan that can be repaid quickly.
When you cannot take out a mortgage on a property because of its dire state
If you find yourself in a situation where you own a property that isn’t mortgageable from a lender’s standpoint, you can always take a bridging loan to bring the property up to speed. This loan is also useful if you want to buy a less than stellar property at a great price, and place a mortgage on it after changes have been made to spruce it up.
When you want to buy a house at a housing auction
If you want to complete the purchase of property from a housing auction, you must pay for the property within a fixed timeframe. Lenders will often not be willing to give you a loan considering it may be difficult to repay the loan within that short a period of time. Therefore, a bridging loan is a great way to get your hands on the required financing to tide you through the whole process.
You can apply for a bridging loan by submitting your Option to Purchase document. Most banks that offer home loans also offer accompanying bridging loans. Keep in mind that you cannot take loans from two different banks because the property is tied to one bank alone.
There are two types of bridging home loans in Singapore.
With this financing, it is only after you finish selling your original property that your repayment of the bridging loan will be activated, and the bank will choose to finance the entire amount of your new home. Interest will be accruing over the entire tenor of your bridging loan and you will have to cover the entire principal amount and the resulting interest.
With this financing, you will be expected to make simultaneous payments on both loans - your home loan and your bridging loan. You get a time frame of 12 months that you can use to sell your old property and repay the loan.
The journey of buying homes for many Singaporeans tends to start with the purchase of an HDB flat. With time and with greater financial stability, an upgrade in the standard of life is required and you move on to either a private property, a bigger HDB, or an Executive Condominium (EC).
So what exactly do you need to keep in mind when you are taking out a bridging loan after you sell your HDB flat? Look at the following example to answer that question.
Assume that you currently own a 3-room HDB that is valued at S$500,000 and you want to sell it. You have recently gone house shopping and have decided to go after an EC that is valued at S$1 million.
Put down 1% booking fee to secure the condominium = S$10,000
Pay the remaining 4% down payment in cash = S$40,000
Pay Buyer Stamp Duties (3% of valuation - S$5,400) = S$24,600
15% remaining down payment in cash = S$150,000
Total amount needed to secure CE = S$10,000 + S$40,000 - S$150,000 = S$200,000.
This is assuming you have sufficient savings to cover the S$24,600 stamp duties without needing a loan. To make up for the S$200,000 you do not have, to ensure you secure your new home, you can take out a bridging loan in the short-term to cover the down payments.
Another aspect of the transaction you need to keep in mind is whether taking out a bridging loan is worth it. Will you benefit enough that it will offset the costs of taking out the loan in the first place, or will it put an added financial burden on you that you cannot pay off in the short run? Also, you should consider whether you have an exit strategy in place. Without one, you have no way of knowing whether your old home will sell and what to do in the event that it does not, and you have no funds with which to pay off your bridging loan.
Standard Chartered HDB Bridging Loan:Apply for an HDB Bridging Loan with Standard Chartered without having have to deal with any processing fees, monthly installments, or upfront arrangement fees. Interest rates start at 3M SIBOR rate + 2% p.a.
DBS Bridging Loan:Borrow up to 20% of the property purchase price to meet your new property’s initial down payment. Repayment period cannot exceed 6 months.
SBI Bridging Loan:The minimum required annual income is S$30,000. You only have to pay service interest during the repayment period of up to 6 months. Get loan amounts of up to S$300,000. No cancellation or processing fees are involved.
UOB Home Loans:UOB offers customers to apply for a bridging loan as part of the home loan package. This loan is available for the purchase of HDB properties as well as private homes.
While bridging loans are tempting because of your immediate access to funds, without a clear exit strategy in place you might just lose your home. Also, if you are not able to take on two mortgages while the original property is being sold, or if the interest charges are too high, this may not be the loan for you. If, on the other hand, you are able to maintain both mortgages simultaneously and do not mind the high interest in order to secure your dream home (before it is grabbed by some other party), this just might be what you need. All said and done, we would advise you to take a bridging loan with care. Your ultimate decision should rest on your financial needs and your ability to pay back the loan.