What Is a Bridging Loan: a Complete Guide

What is a bridging loan: a complete guide

From home loan and mortgage costs to loan interest and other expenses, moving house in Singapore can be expensive. 

If you’re moving from your current home to a new HDB flat or making any other kind of property purchase, a bridging loan can help you bridge the financial gap between two loans– those covering your old property and your new property while you’re waiting for your sales proceeds to come through. 

As moving house can often be unpredictable, bridging loans and other short-term loans can greatly ease the financing burden many Singaporeans face when buying a property. 

Usually, your existing bank will offer home loans and bridging loans, as well as other financial products. But it’s best to do your research to find a good-fitting bridging loan that will help you raise capital quickly with an easy application process. 

You should always compare financial products between different moneylenders to find a bridging loan that properly meets your needs.

What Are Bridging Loans and How Do They Work?

Here in Singapore, it’s not uncommon to own and live in more than one property throughout your life. In short, banks offer bridging loans to people who need to fund the down payment on their next property purchase before the sale proceeds from their old property have fully cleared. 

Bridging loan packages come in all shapes and sizes. More often than not, you can get:

  • A maximum tenure of six months – it is mandatory to settle most bridging loans within this time.
  • A max. amount based on your circumstances – the net sales proceeds and CPF funds from your old property will dictate the maximum amount you are entitled to borrow for your bridging loan.
  • Attractive interest rates – The average loan interest rate sits at around 5% – 6%.

Most bridging loan types will offer a maximum amount of up to 20% of your property value, particularly if you are borrowing for a HDB flat loan. However, as long as the sales proceeds from your old house can cover the non-cash down payment share of the loan, you can usually get a more favourable limit approved. 

In some cases, you can even enjoy a lower loan-to-value (LTV) ratio at the same time.

What Types of Bridging Loan Can I Apply for? Capitalised Interest Bridging Loan, Temporary Bridging Loan Programme and More Explained

In most countries, there are two main types of bridging loan available, which are:

  • Capitalised 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 later.

  • 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.

Here in Singapore, there is a six month loan repayment mandate on all bridging loan types. This means that rather than choosing between the two bridging loan packages above, your bridging loan situation revolves more around whether you want your bridging loan to:

  • Bridge the down payment cost between your current home and your new property transaction only
  • Bridge this gap and include a portion of your home loan as well

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 

  • It’s fast

The loan application process usually takes less than 14 days. 

  • There are no monthly repayments

Bridging loans are usually available to anyone who has assets to repay the loan, making them great for customers with tight cash flow.

  • You can get a low interest rate 

Bridging loan interest rates typically start from 0.37% monthly, and market competition means that exclusive promotions are quite common, too. 

  • You can purchase a property without a deposit 

If you have negotiated a lower purchase price – i.e., you are buying a property for less than its asking price – you can often buy your new home without a deposit, as your bridging loan borrowing still can be based on the full price of the home.

  • Various property types can be purchased

Uninhabitable homes and other property variants that might not be eligible for a standard home loan can usually be purchased via a bridging loan, making bridging loans slightly more flexible than traditional home loans or mortgage deals.

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.

  • Bridging loans are only available as short term loan deals

As most of these kinds of loans are limited to six months maximum tenure, you could face financing complications – and even repossession – if you have problems with your chosen method of loan repayment. One example could include a working capital shortage if you cannot sell your old property and pay for your new one in a timely manner.

  • There could be other expenses involved

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.

Which Banks Offer Bridging Loans?

DBS Bridging Loan Standard Chartered HDB Bridging Loan UOB HDB Home Loan
Bridging loan interest rate from bank Prime rate 3M Sibor + 2% per annum From 4% to 5%
Max. loan tenure Six months max. Six months max. Six months max.
Property types covered All property variants covered Standard Chartered covers HDB homes only UOB covers HDB homes only

What Must You Consider Before Getting a Bridging Loan?

Regardless of which bridging loan packages you are interested in, there are a number of things you’ll need to consider before applying for your loan and seeking approval. The most important things you should do, are: 

  • Weigh up the total cost 

When approaching your preferred bank, you’ll need to think about the total cost of your loan rather than just the interest you’ll be required to pay. Ask your bank for a full cost breakdown and remember that your property’s value will affect what deals financial institutions can offer you.

  • Consider viable repayment methods 

During the application process, you’ll need to agree on a preferred payment method with your bank. Make sure your bank bridging loan gives you enough time to secure a buyer and always factor in that you might not get offered the full purchase price for your property, too. 

Consider different exit strategies to ensure you will definitely be able to repay what you owe at the end of the term.

  • Make sure you’re getting the best deal 

Obviously, you should try to avoid financial institutions with a higher interest rate, as well as those that might force you to pay expensive hidden costs.

Always compare the market and keep an eye out for exclusive access to special bank deals and exclusive promotions. DBS Bridging Loan might offer a prime rate, but is it really the best deal for you? Can you get a better deal by using mobile apps and comparison sites to compare? Or by approaching a licensed moneylender? Always do your research.

Bridging Loan Queries: Frequently Asked Questions

Here are a few frequently asked questions about bridging loans, interest and other bank financial products. 

Are bridging loans a good idea? 

As with any other decision made regarding home loans, personal loans or other types of finance, this will depend on your unique circumstances. 

These kinds of loans can cover the remaining amount needed beyond the LTV you’re applying for when moving house – and this can prove to be very helpful for Singaporeans who need to sell and buy a house and need fast financial assistance. 

Just make sure you aren’t overstretching yourself and will definitely be able to repay via the agreed means.

Can I get a bridging loan with a bad credit? 

This will depend on the risk appetite of your preferred bank or moneylender. More often than not, you will be subjected to an assessment based on your credit report from Credit Bureau Singapore and will only receive an approval if you have a favourable score. 

This is especially true if you are applying for exclusive access to a deal with a promotional rate. If you are worried about your credit rating, consider applying through a licensed moneylender like A1 Credit.

Where can I get a bridging loan?

Most banks in Singapore offer home loans, bridging loans, personal loans and various other types of finance. You should always compare the market to get the best deal – and ensure you are able to fully repay any amount you borrow.

Conclusion: How to Find the Best Bridging Loans

If you need a bridging loan to help you buy a house or flat, we’d recommend familiarizing yourself with what they are, how they work and where you can apply first. Whether you decide on a capitalised interest bridging loan or a simultaneous repayment deal, you’ll need to make sure that:

  • You can afford to repay the total cost

Make sure your loan repayment method is viable and factor-in any potential delays receiving sale proceeds, or any possibility your old property won’t receive its full asking price.

  • You are choosing the right type of loan

Bridging loans can help you move house and cover your property transaction costs simultaneously, but this kind of short-term commitment isn’t for everyone. Weigh up all the factors at play and don’t rule out a traditional home loan mortgage if it seems like the better option.

  • You are getting a good deal

Interest is pretty much always competitive on bridging loans, but you should still compare the market for the best possible deal available to suit your needs.

Here at A1 Credit, we offer competitive, flexible loans with lightning-fast applications that take less than one hour. If you are about to sell a house and move into a new place, you can borrow up to $200,000 in three quick and easy steps – without the need to pay until completion date. Check out our bridging loan deals now.

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