Upgrading from an existing property to a new one can, at times, seem to be challenging. This is especially the case if you have placed your current property on the market and are waiting for it to be sold so you can fund your next property purchase.
The main concern is that one might not have the funds to pay for the down payment of their new flat or property. In other cases, one might not want to deplete their cash reserves by paying for the down payment with their own money.
In both these cases, one excellent option for the home upgrader is to use a bridging loan from a money lender or bank.
What is a Bridging Loan?
Bridging loans are short-term financial loans that help pay for the second non-cash down payment for the new property when one is looking for a home upgrade. One can take the loan as they wait for their old house to sell and use its funds, or the CPF savings refunded to pay it back.
How Does a Bridging Loan Work?
Typically, most properties require the buyer to make two down payments. The first down payment is smaller and is a cash payment. The second down payment is the more significant of the two and is a non-cash deposit on the next property purchase.
However, one may not have this second down payment or might not want to deplete their cash reserve or savings by making the payment. In these cases, one will apply for a bridging loan to help pay for the deposit as they wait to sell their old property. This will help the buyer secure the purchase agreement for their new house.
Two Types of Bridging Loans
There are only two types of bridging loans. While these two loans can be used the same way, they have a few differences. Let us look at each bridging loan and what makes it different.
1. Simultaneous Repayment Bridging Loan
These loans will require the borrower to pay the loan back in monthly repayment instalments as they also simultaneously pay back the home loan. These are the most accessible bridging loans to borrow since licensed moneylenders and banks offer them in Singapore.
2. Capitalised Interest Bridging Loan
Unlike simultaneous repayment bridging loans, a capitalised interest bridging loan is only available from banks. Whenever you borrow any bridging loan amount under this policy, the loan repayment will only kick in after the old property has been sold.
The borrower must pay the loan amount in one lump sum. Apart from using the net sale proceeds from their old home, one may use the resulting CPF funds to make the payment.
Why Apply for a Bridging Loan?
The bridging loan scenario is something that any borrower looking to take should carefully examine to ensure they are making a sound financial decision. Here are a few examples:
1. Upgrading a Property
This is the typical bridging loan scenario. Here, the buyer is still waiting for the sale proceeds from their old property.
In most cases, they do not have the funds to cover the down payment (generally about 20% LTV ratio (Loan to Value) of the purchase value. They can take a bridging loan to make the payment and secure the agreement for the property purchase.
2. En Bloc Sale
Anyone selling their old property, which happens to be part of an en bloc sale, will make a higher profit from the property transaction. Their net sales proceeds from the sale will be significantly higher.
Thus, they will not have to worry about the high interest on bridging loans, especially if they want to purchase the next property quickly without waiting to sell the existing home.
3. Selling a Recently Renovated Property
A borrower might decide to borrow a bridging loan to help them complete a renovation of a property they have listed on the market. While this is a great option, especially for homeowners wanting to get funds quickly, a home renovation loan might be better for their financial situation.
Factors to Take into Account When Picking a Bridging Loan
As is the case with taking any loans or financial products, one should consider before making their final decision. Some of the significant factors to take into account when selecting a bridging loan package include:
1. Interest Rates
The bridging loan interest rates vary depending on the provider. A higher interest rate will mean one must pay more interest accrued. Banks have the lowest interest rates since they require the applicant to provide collateral. Moneylenders have an interest rate of 1-4% per month. The interest is higher since they do not need one to provide collateral for the loan.
2. Loan Amount
Moneylenders offer bridging loan amounts of up to 6 times the applicant’s monthly income. On the other hand, banks can provide more by requiring higher collateral.
3. Tenure
The loan tenure for most bridging loan packages on the market is a month or until the sale of the old property goes through.
4. Monthly Repayments
Typically, one must make monthly loan repayments for a bridging loan from a money lender or bank. However, banks offer bridging loans that do not have monthly repayments but a lump sum payment when the sale of the listed property is completed.
5. Risks
The main risk is that your collateral will be seized and auctioned to pay for the loan when you default. However, this will not happen immediately as the bank will give the borrower some time, referred to as the prepayment penalty period.
During this period, the borrower is charged additional interest on the loan. It is until they fail to make payments after this extension that their collateral is seized.
There is no risk with a bridging loan from a moneylender because they do not require collateral. However, when one defaults, they are listed with the credit bureau.
Processing Time
Moneylenders have a faster processing time for loan applications compared to banks. They can process the loan within the same day, while it might take several weeks for a bank to do the same.
Top Bridging Loans in Singapore
Below is a comparison table looking at some of the top bridging loans in Singapore;
Comparison Table
|
|
Interest Rate |
Loan Quantum |
Collateral |
Good Credit Score Required |
|
Licensed Money Lenders |
1-4% Per Month |
6x monthly income |
Not required |
Not Essential for approval (used to determine rate) |
|
Maybank |
Best interest rates |
Depend on property value |
Needed |
Essential for approval |
|
UOB |
4-5% Per Year |
Depend on property value |
Needed |
Essential for approval |
|
DBS Bridging Loan |
Prime Rate |
Depend on property value |
Needed |
Essential for approval |
Why are Moneylenders an Alternative Option?
Licensed moneylenders are a great alternative to banks for bridging loans. This is especially true for people looking for a smaller bridging loan amount. Here are factors that make money lenders an excellent alternative:
- The loans they provide do not have to be secured with collateral like banks.
- People with no or bad credit can still borrow a bridging loan from money lenders. This is because the lenders only look at the income and ability of the applicant to pay back the loan.
- Bridging loans from money lenders can be approved on the same day compared to banks that typically take up to a month to approve loans.
- Money lenders also have lower processing and legal fees for bridging loans than banks. Typically, they charge a fee of up to 10%, while banks tend to charge anywhere from 6.5%-20%.
Applying Through Licensed Moneylenders
They are general eligibility and requirements for applying for a loan from a moneylender such as 1 Fullerton Credit. Below are some of the most common conditions to get a bridging loan:
Eligibility and Requirements
- ID card/NRIC
- Proof of address
- Employment letter
- Option to Purchase (OTP)
- SingPass
- Any other requirements you may be asked to provide by the moneylender.
Frequently Asked Questions
What is the aim of a bridging loan?
To pay the down payment of a new property a borrower wants to buy.
Is a bridging loan the same as a temporary bridging loan?
No. A bridging loan is used for property purchase, while funds from the temporary bridging loan programme provide working capital to businesses.
What is the typical tenure of bridging finance?
The tenure is generally one month or untill the existing house is sold.
Closing
Bridging loan in Singapore provide quick financial solutions to people looking to acquire an HDB flat or other property types. They are available from banks and money lenders in Singapore. Here are some of the takes away to keep in mind:
- There are only two types of bridging loans; simultaneous repayment and capitalised interest bridging loans. The former is available from banks and licensed money lenders, while the latter is only from banks.
- Money lenders have lenient requirements, making them an excellent option for individuals without collateral or those with lower credit ratings.
- Money lenders have lower processing fees and generally process loan applications within a day. They charge a fee of up to 10% of the loan amount.
For anyone looking for a bridging loan, finding an excellent fit for your requirements should not be challenging. 1 Fullerton Credit is among Singapore’s top licensed money lenders and offers you various loan options. Get a quotation for any loan of your choice today.
