Upgrading to a new property is an exciting venture, but it can also come with financial challenges, especially if you need to pay the downpayment for your new home before receiving the proceeds from the sale of your previous property. To bridge this financing gap, many Singaporeans turn to bridging loans offered by banks or licensed money lenders. In this article, we will delve into what a bridging loan is, its types, how to apply for one, and the pros and cons of using this financial solution.
What is a Bridging Loan?
A bridging loan is a short-term financing option that allows you to pay for the downpayment of a new property while waiting for the proceeds from the sale of your old one. It serves as an interim solution to ensure a smooth property transaction without the need for immediate cash on hand. Bridging loans are commonly used by individuals who want to sell their old flat to upgrade or downgrade.
Types of Bridging Loans:
- Capitalised Interest Bridging Loan: This type of loan covers the entire cost of the new property. Loan payments start only after your old home has been sold, avoiding the simultaneous burden of downpayment and mortgage payments. With the capitalised interest bridging loan, you have the flexibility to focus on selling your old property without the immediate pressure of mortgage repayments for the new one. However, the longer selling time and higher interest rates may make the repayments less affordable in the long run. It is essential to carefully assess your financial situation before choosing this option.
- Simultaneous Repayment Bridging Loan: With this option, you are required to repay both the bridging loan and the home loan simultaneously. While it can be more challenging to manage both loan repayments simultaneously, it can be a good option if you want to pay less interest on your bridging loan. By repaying the home loan and bridging loan together, you may reduce the overall interest costs and avoid potential penalties for exceeding the term of the loan.
How to Apply for a Bridging Loan:
Applying for a bridging loan in Singapore involves the following simple five-step process:
- Compare loan quotes from reputable lenders: Start by researching and comparing bridging loan offers from different banks and licensed money lenders. Look for competitive interest rates, flexible repayment terms, and quick processing times.
- Choose the best lender and bridging loan: After comparing the loan offers, select the lender and the type of bridging loan that best suits your financial needs and preferences.
- Verify that you meet the eligibility criteria: Each lender may have specific eligibility requirements. Common criteria include being a Singaporean or permanent resident, being above 18 years of age, earning a minimum monthly income, and having exercised the Option to Purchase (OTP) for the new property.
- Submit your application to the selected lender: Gather all the necessary documents, including your latest Central Provident Fund (CPF) withdrawal statement, OTP document, latest bank loan statements, proof of income, and other supporting documents as required. Submit your application to the chosen lender for assessment.
- Receive your bridging loan funds within 24 to 48 hours: Once your application is approved, you should receive the bridging loan funds in a relatively short time, usually within 24 to 48 hours.
Pros and Cons of Bridging Loans:
Pros:
- Convenience: Bridging loans provide a practical solution for covering the downpayment when buying a new property while waiting for the sale proceeds. This enables you to proceed with your property transaction smoothly and without delays.
- Flexible Repayments: Some bridging loans offer options to pay principal before interest, providing flexibility in repayment. This can be particularly advantageous if you expect to receive the proceeds from the sale of your old property soon and want to reduce overall interest costs.
- Fast Application and Approval: With either a capitalised interest bridging loan or simultaneous repayment bridging loan, your application will typically be approved by money lenders within a day or a week. The quick process allows you to settle the matter quickly and concentrate on other aspects of your property transaction.
- Low Interest: The monthly bridging loan interest rate is between 5-6% per annum. In comparison to a 6% rate per month on a personal loan, this arrangement is much cheaper. A personal loan may also come with a minimum repayment tenure, before which you will be charged an early repayment penalty.
Cons:
- Short-Sell Risk: An old property does not always sell for the price you expect. If you sold your home for less than the amount of your bridging loan, you might have to increase your property loan repayments in the future. It is crucial to assess the current property market and consult with property agents to estimate a realistic selling price.
- Valuation Expenses: Bridging loans require you to collaborate with two financial institutions, one for the old property and another for the new one. As a result, you can expect different property valuations from both institutions. This will cost you, and it may cause downpayment loan amount issues. Consider using the same financial institution for both properties to streamline the valuation process.
- High Interest: Mortgage interest rates are charged daily but are valued annually. A bridging loan, on the other hand, has variable interest rates per month. You might find yourself paying more interest under a HDB bridging loan than you would pay for a mortgage. Before deciding on a bridging loan, compare the interest rates and terms from different lenders to choose the most cost-effective option.
Alternatives to Bridging Loans:
- Temporary Loan Scheme: This is a financial assistance program provided by the Singapore government. As with standard bridging loans, Singaporeans can now purchase a new apartment without having to pay a long-term mortgage loan. The Temporary Loan Scheme allows buyers to defer the downpayment for a new flat for up to 8 weeks after collecting the keys to the new flat.
- Personal Loans: Singaporeans and foreigners can get personal loans from banks and authorised money lenders. Depending on your lender, personal loans from banks can cover up to six monthsβ worth of your monthly salary or more. Personal loans can serve as bridging loans for borrowers who don’t qualify for traditional bridging loans or need a shorter repayment period.
Consider Carefully If You Need a Bridging Loan:
Now that you understand what a bridging loan is and how it works, carefully consideryour financial situation and property transaction needs. Bridging loans are designed to provide specific short-term solutions for property buyers and sellers. It’s essential to weigh the pros and cons carefully, considering your specific financial situation and repayment capabilities. If you decide that a bridging loan is the best option for your property transaction, remember to choose a reputable lender with competitive rates and a track record of excellent service.
At Avis Credit, we offer fast bridging loan approvals and competitive interest rates. Our experienced team is committed to helping you navigate the loan application process and find the best package for your needs. Contact us today to explore our financial solutions and find the ideal bridging loan for your property journey. Alternatively, you can apply for a loan with us now to get the process started quickly and efficiently.
