A Comprehensive Guide to Bridging Loans for Homebuyers

As Singapore’s housing prices fluctuate—rising 1.4% in early 2024, according to Channel News Asia—bridging loans become crucial for homebuyers facing the timing gap between purchasing a new home and selling an existing one. 

These loans are especially vital in quick-turnaround scenarios like auctions. This guide explores how bridging loans function, their types, and key features, providing essential knowledge for those looking to upgrade or buy their dream home amidst financial uncertainties.

What is a Bridging Loan?

A bridging loan in Singapore is a short-term loan option designed to help buyers manage the financial gap between purchasing a new property and selling an existing one. This type of loan is particularly useful in real estate transactions where timing and swift action are crucial.

In Singapore, these loans are frequently utilized by either upgrading or downsizing homeowners. They allow homeowners to cover upfront costs such as down payments and other transaction-related expenses while awaiting the proceeds from their property sale.

Consider this scenario:

Jane and Raj, a couple living in a 3-room HDB flat in Tampines, have been eyeing a new condominium in Pasir Ris as a potential upgrade for their growing family. They find the perfect unit, but there’s a catch—their current HDB flat has not yet sold, and they need substantial funds to secure the condominium.

With the condominium drawing interest from multiple buyers, Jane and Raj can’t afford to wait for their HDB flat to sell before making an offer. To manage this, they apply for a bridging loan. 

Here’s how it helps:

• Immediate Access to Funds: Upon approval, the bridging loan provides them with the necessary capital to make the down payment on the condominium, effectively securing it before their HDB flat is sold.
• Short-Term Financial Relief: The bridging loan covers their financial needs for a short period, typically six to twelve months, giving them a buffer while they find a buyer for their HDB flat.
• Smooth Transition: With the bridging loan covering the interim period, Jane and Raj can move into their new home without having to wait for their HDB flat’s sales process to conclude. This seamless transition prevents them from having to find temporary housing, saving both time and additional costs.

Bridging Loan Pros and Cons

Bridging loans offer attractive rates and a financial safety net when moving from your old property to your new property. They can prove invaluable if you’re not sure whether your house sale will clear and you’ll be able to move into your new property quickly. 

That said, using a bridging loan from a bank to raise capital in this way doesn’t come without risks. Here are some pros and cons:

Pros

• Speed: The loan application process usually takes less than 14 days with banks. Legal moneylenders, on the other hand, can approve loan applications within 30 minutes. 
• Immediate Liquidity: Bridging loans provide immediate funds to finance a new home purchase before the sale of your current property, ensuring you don’t miss out on buying opportunities. In fact, legal moneylenders can disburse cash within a day.
• Accessibility: Available through major banks and licensed money lenders, offering varied options to borrowers with different needs and financial profiles.
• Flexibility in Property Purchase: Bridging loans allow buyers to purchase a variety of property types, including those that may not qualify for standard mortgages (e.g., uninhabitable homes). 

Cons

• It might be more expensive than traditional home loan mortgages: Interest rates may very well be low and market promotions might be commonplace, but on average, standard home loans still tend to cost less overall than bridging loans.
• Short-term nature and repayment risks: As most of these kinds of loans are limited to six months maximum tenure, you could face financing complications. With legal money lenders, the loan tenure is only up to 1 monthly only or until the property’s completion date.
• Potential hidden costs: While bridging loan rates are usually cheap and competitive, you should look out for other expenses and potential hidden costs, such as exit fees and fund management fees, which are often overlooked.

Bank vs Licensed Moneylender Bridge Loans

For individuals seeking bridging loans, several banking options are available. 

DBS offers bridging loans with an interest rate based on the prime rate and covers all property types, while Standard Chartered provides HDB bridging loans tied to the 3M Sibor + 2% per annum, specifically for HDB homes. UOB also caters to HDB property purchases with interest rates ranging from 4% to 5%. 

All three banks offer a maximum loan tenure of six months.

In addition to these banking institutions, legal money lenders also offer bridging loans for HDB transactions. These licensed lenders often provide affordable loans and faster approval processes, making them a viable alternative for those needing quick financial solutions.

At a glance:

Provider Type	Interest Rates	Max. Loan amount	Processing Speed	Flexibility in Terms	Suitability
Bank	Lower (5% – 6% p.a.)	Bridging loans cover up to 25% of the new property’s purchase price	Up to 14 days or longer	Less flexible, stringent eligibility requirements	Ideal for borrowers with good credit and no urgent cash need
Licensed Moneylender	Higher (up to 4% per month)	Up to 6x your monthly income	Approvals can be as fast as 30 minutes	More flexible, accommodates poorer credit	Suitable for those needing quick funding or with lower credit scores

Key Features of Bridging Loans

Capitalized Interest Bridging Loan vs Simultaneous Repayment Bridging Loan

Capitalized Interest Bridging Loans and Simultaneous Repayment Bridging Loans focus on how payments are structured during the loan term:

• Capitalized interest bridging loan: With this type of bridging loan, no repayments are required on the new loan while you are selling your old home. The bank will pay the entire property purchase price and monthly repayments will kick in after you have sold off your previous property.
• Simultaneous repayment bridging loan: With a simultaneous repayment bridging loan, you are expected to abide by loan repayment rules in tandem with your sale/purchase. You’ll only have 12 months to complete your initial property sale and start your bridging loan repayments.

Other Features:

• Loan Tenure: Typically, bridging loans have a tenure of six to twelve months, reflecting their short-term nature. They are meant to be settled once the original property is sold.
• Loan Amount: The amount you can borrow often depends on the net sales proceeds and CPF funds available from your previous property. Bridging loans can cover up to 20% of the new property’s value, particularly for HDB flat transactions. However, with a legal money lender, you can borrow up to 6x your monthly income.
• Interest Rates: HDB bridge loans with banks have an interest rate ranging between 5% and 6%. On the other hand, a legal lender can only charge up to 4% per month.
• Loan-to-Value Ratio: Favorable loan-to-value ratios are possible, especially if the sales proceeds from your old property cover a significant portion of the new purchase. This can sometimes result in a lower LTV ratio, making the loan more manageable.

Costs Associated with Bridging Loans

Example Potential Cost Scenarios:

Home Upgrade

Sara is in the process of upgrading from her current home to a larger one, a process which requires a quick sale of her existing property to finance the new purchase. She decides to take out a bridging loan with a legal money lender of S$50,000 to cover the gap between buying her new home and selling her old one.

Using an online calculator, Sara will need to pay approximately S$9,513 per month. Over the six-month period, the total interest she pays adds up to S$7,079.

Use Our Loan Calculator to find Out How Much You Can Afford Monthly

Eligibility and Application Process for Bridging Loans

When Applying with Banks

Eligibility:

• Age: At least 21 years old
• Citizenship: Must be Singapore Citizens or Permanent Residents 

Note that eligibility requirements may vary per bank or financial institution. For instance, Standard Chartered HDB Bridging Loans also require borrowers to:

• Provide evidence that they are in the process of selling their existing property.
• Both the property being sold and the one being purchased must be in Singapore
• The borrower must be the owner of the property being sold
• The borrower must be buying another flat either from the HDB or resale market or directly from HDB.

Documents Required:

Document requirements may vary per bank or financial institution. Here are the most common:

• Option to Purchase (OTP) documentation for a new property
• Exercised OTP for your existing property
• CPF withdrawal statements
• Latest bank loan statements

Note that, in Singapore, most banks offer bridging loans along with home loans as part of their products.

When Applying with Legal Money Lenders

Eligibility:

• Age: At least 21 years old
• Minimum income: Must earn a minimum of S$2,000
• Exercised the option to purchase (OTP)

Documents Required:

• Salary slips and employment letter as proof of income and employment
• NRIC (for identity proof)
• Property documents as proof of residence
• Singpass to access CPF, IRAS, and HDB websites
• Copy of the OTP

Step-by-Step Guide on Applying for a Bridging Loan

Applying for a bridging loan in Singapore involves different procedures depending on whether you choose a bank or a licensed money lender. Below is a detailed guide for both options:

Banks

• Registration: Begin by registering with your chosen bank. This might involve creating an account online or visiting a branch in person.
• Initial Consultation: Speak with a bank representative to discuss your need for a bridging loan. This step is crucial as it allows you to understand the specific requirements and terms of the loan offered by the bank.
• Online Application: Access the bank’s online portal dedicated to bridging loan applications. Here, you will find the application form and instructions for your loan request.
• Document Submission: Upload all required documents. This typically includes the Option to Purchase (OTP) for the new property, the exercised OTP for your existing property, CPF withdrawal statements, and your latest bank loan statements.
• Application Submission: Review your application and all the inputs carefully. Finalize and submit your application online. Ensure that all details are accurate to avoid delays in processing.
• Review and Approval: The bank will review your application and documents to determine eligibility. This process may take a few days to a week. Upon approval, you will be notified, and the loan amount will be disbursed according to the terms discussed.

Note: Banks typically have stricter eligibility criteria, which might include a check on your credit report. If your credit history is less than ideal, consider exploring options with licensed money lenders.

Licensed Money Lenders

• Research Bridging Loans And Compare Plans: According to financial experts at Bankrate, it’s worth shopping around and exploring options from different companies to see what else is available. Make sure to compare different plans to find the best deal. 
• Online Application: Complete the application form available online on the lender’s website. This form will ask for personal and financial details necessary for your loan request.
• Document Submission: Submit the required documents, which may vary slightly from those needed by banks. Here are the documents needed:
  • Identity card / NRIC
  • Proof of residence (utility bill, a letter addressed to you and/or tenancy agreement)
  • Proof of employment (certificate of employment or recent 3 months payslip)
  • SingPass (To log into CPF, HDB, IRAS website)
  • Copy of the “Option To Purchase” (OTP)
• Wait for Approval: After submitting your application and documents, wait for the lender to review them. This process is usually quicker than with banks. You will receive a confirmation call or email once your loan application is approved.
• Loan Disbursement: Upon approval, the loan amount will be disbursed directly to you. This can be as quick as within a day, depending on the lender’s processes.

Real-Life Examples and Case Studies

A Family Triumphs with a Non-Contingent Bridge Loan

In the competitive real estate market of Los Altos Hills, a growing family found their dream home, perfect for accommodating their two children. The challenge? They were up against multiple all-cash offers, a daunting prospect for any buyer.

To navigate this, they secured a $2.1 million non-contingent bridge loan, enabling them to make a strong offer with a 14-day close. This strategic move positioned them favorably against the cash buyers, allowing them to secure the property quickly and efficiently.

Thanks to the bridge loan, the family not only outperformed other offers but also expedited their purchase, ensuring they didn’t miss out on the perfect home for their expanding family.

Emily’s Smooth Transition with a Bridging Loan

Emily, a first-time homebuyer in bustling London, found herself in a classic property chain dilemma. Eager to move into her dream home but hindered by the need to sell her current residence, she decided to take a strategic step.

Opting for a bridging loan, Emily was able to purchase her new home without having to wait for her old one to sell. This choice, while initially intimidating, turned out to be immensely beneficial. The bridging loan provided her the necessary funds to proceed with the purchase, thereby removing the stress and time constraints typically associated with selling a property first.

Alternatives to Bridging Loans

Financing Option	Interest Rate	Loan Term	Suitability	Best Used For
Personal Loan	3% – 7%	1 – 7 years	If your financing needs are relatively small and do not justify the high costs associated with bridging loans.	Smaller, personal expenses not requiring collateral
Traditional Mortgage	1.5% – 3.5%	15 – 30 years	Ideal for home buyers who are purchasing a property without the pressure of selling an existing one immediately.	Purchasing a home with a long-term repayment plan
Home Equity Loan	2% – 5%	5 – 30 years	Suitable for homeowners who have built substantial equity in their property and need funds for large expenses.	Large expenses, requiring the use of home equity as collateral
Line of Credit	4% – 8%	Varies	Unlike a traditional loan, you only pay interest on the amount you actually use.	Flexible borrowing for various personal and business needs

Closing

Bridging loans provide an essential financial bridge for homebuyers in Singapore’s dynamic real estate market. By understanding these loans’ intricacies and exploring viable alternatives, borrowers can strategically manage property transactions and maintain financial stability. 

Key Takeaways:

• Bridging loans are for those actively transitioning between selling one property and buying another in Singapore.
• Applicants must be at least 21 years old and Singapore Citizens or Permanent Residents. Essential documents include the Option to Purchase for both new and existing properties, CPF statements, and bank loan statements. 
• Through licensed moneylenders, terms can include interest rates of 1-4% p.m., loans up to 6x monthly salary, and flexible repayments up to one month or until completion, often with quicker processing. With banks, bridging loans typically cover 6-12 months and finance up to 20% of a new property’s value with interest rates of 5-6% p.a.

At A1 Credit, we offer competitive, flexible loans with fast applications that take less than one hour. If you are about to sell a property and move into a new place, you can borrow up to $200,000 in three quick and easy steps. Check out our bridging loan deals now.