A Complete Guide to Effectively Using a Bridging Loan

how does bridging loan work

You need to sell your property before you can buy a new one. Unfortunately, the condo promotion you’re after is about to expire before you can sell your property.

Thanks to bridging loans, you have enough capital to use the condo interest rate promotion before it expires. First, banks and financial institutions will give you enough down payment for your new property. Then, you can pay for your bridging loan once you successfully sell the property.

Bridging loans omit the waiting time because banks will give you equity-based capital. However, these loans carry their respective risks. You can learn everything about bridging loans in this fully detailed guide.

How Do You Use Bridging Loans For Condo Upgrades?

First, you must secure your Option to Purchase (OTP) certificate. This document verifies that you’re within your rights to purchase a new property. On the other hand, non-HDB condo sellers won’t require this from you.

You can approach banks with your OTP. First, the bank will assess your loan application. Then, they will initiate an equity assessment on your sellable property. Banks who approve your loan application can give you a bridging loan.

Your bridging loan’s value can be 75% of the new property’s loan-to-value (LTV) ratio. Alternatively, you can use your bridging loan to receive enough capital for a 5-20% moving-in fee.

Down payment

(5% cash)

5% x S$1,000,000 = S$50,000
Down payment

(20% cash and/or CPF funds)

20% x S$1,000,000 = S$200,000
Loan amount

(Assuming you qualify for maximum

75% Loan-to-Value)

75% x S$1,000,000 = S$750,000

Bridging Loan Features

Most banks will offer you a bridging loan with similar features. You can check the following details below.

Loan Amount

Bridging loans can provide you with 5-20% of the new property’s down payment value. Alternatively, your bank can give you up to 75% if you qualify for the new property’s maximum LTV. Your property’s equity value and your CPF balance from the speculated approved sales proceeds is the maximum bridging loan amount you can receive.

Interest Rate

Most Singaporean banks will give you a 5-6% yearly interest on your bridging loan. Thus, if you sell your property early, you can get low-interest payments afterward.

Repayment Period

All bridging loans have a 6-12 repayment period. Borrowers must have sold their property at the best possible purchase price during this period. Remember, home loans and bridging loans differ in loan terms because the former can give you decades to pay for a property’s LTV.

Take Note of These Crucial Things About Bridging Loans

You’ve fully understood all details about a bridging loan. At this point, you must take note of a bridging loan’s possible trouble spots. Wise borrowers fully understand that every loan carries a risk. Bridging loans are no different, so take a look at these pointers below.

  1. You’re Using Your Home as Collateral

Banks will ask for other items of value for applicants of home loans. However, they will post your sellable property as collateral for a successful bridging loan application.

Remember, a bridging loan’s value depends on your property’s sellable value. Thus, homeowners who sell their properties below the bank’s expected sales proceeds will have to pay for their loan’s possible remainder.

  1. Property Valuation

Your financial institution will send equity specialists to assess your property’s overall value. Accurate property valuation is essential because you’ll need the best sales proceeds possible from the property purchase.

Homeowners can ensure the best property valuation by hiring their equity specialists. Unfortunately, some specialists can have biases for banks and can unnecessarily devalue your existing home’s equity. Thus, a second or third current home evaluation gives your old house the most transparent value possible.

  1. Bridging Loan Payment Methods

You can pay your bridging loan in two ways. Choosing one can affect your budget in various ways, so choose carefully.

  1. Capitalised Interest Bridging Loan

A capitalised interest bridging loan gives borrowers much more interest rate payment flexibility. You can pay home loans in the same manner.

Banks will have you pay for your bridging loan and home loans. Then, they’ll charge you for interest payments after you’ve paid the bridging loan sum and home loan total in a lump sum.

The enormous interest amount might be too high for some borrowers. However, you can use a low-interest personal loan to pay for this lump sum quickly.

  1. Simultaneous Repayment Bridging Loan

A simultaneous repayment bridging loan will have you pay your bridging loan, bridging loan interest rates, and mortgages simultaneously. This payment method is ideal because you won’t have to consider interest payments by the bridging loan and mortgage’s end.

However, this bridging loan payment method isn’t ideal for borrowers who have sold their properties below the purchase price. In addition, borrowers in a poor financial state will find capitalised interest payments convenient if sudden emergencies arise.

How Do I Apply For a Bridging Loan?

How Do I Apply For a Bridging Loan?

Virtually every bank’s bridging loan offer uses the same steps we’ve listed below. However, take note of some bank-specific facilities you’ll need to access. These can be your bank’s mobile app or registering an online bank account.

  1. Register a bank account with your chosen bank
  2. Call your bank regarding a bridging loan application
  3. Use the bank’s online bridging loan application facilities
  4. Take note of all eligibility and supporting documents
  5. Submit these documents to your bank
  6. Wait for your loan application results

Borrowers usually have to fulfill these common eligibilities:

  • Excellent credit score
  • Singaporeans and PRs above 21 years of age
  • The borrower is in the process of selling the property
  • The borrower can demonstrate ownership of sellable property

Then, banks will ask you for the following supporting documents:

  • Option to Purchase (OTP) document
  • Your latest CPF withdrawal statement
  • Your latest bank loan statements

Banks might ask you for more documents if necessary.

Are There Effective Alternatives to Bridging Loans?

Singapore’s temporary bridging loan programme works only for businesses because of its enormous sum. Alternatively, borrowers can use a home loan only after finishing their initial move-in fee.

Unfortunately, banks offer bridging loans only to high credit score individuals with stable income and employment. However, using licensed moneylender loan services is an excellent alternative. They won’t require you to pay in a capitalized or simultaneous way. Plus, you won’t have to use your property as collateral.

Licensed lenders have a short-term loan equivalent. It doesn’t work like a home loan, but it provides you with enough capital to pay for the move-in fee of your new house.

Licensed Moneylender Bridging Loan Specifications

Loan Amount S$200,000
Tenure 6 months or until the property is sold
Interest Capped at 4%
Processing Fee Capped at 10% of loan principal
Late Fee S $60 each missed month

Eligibility

Singaporeans and PRS must comply with the following to use licensed moneylender loans:

  • At least 18 years old
  • Minimum of S $1,500 salary required.
  • In possession and exercised the option to purchase (OTP)

Supporting Documents

Licensed moneylenders will ask you for the following documents:

  • 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)

Your lenders may ask you for more supporting documents if they need them.

Other important things you need to know

  • Is a bridging loan a good idea?

Yes. A home seller who wants to benefit from the lower prices of a new property is a typical bridging loan scenario. By using bridging loan packages, home sellers can purchase their new property in no time.

However, it increases the risk of missing your loan repayment. Property owners will have to pay for two loans with high interest on their existing property.

  • How do you pay back a bridging loan?

Most banks will ask you to open a bank account with them. You can use the app to auto-debit your bridging loan payments.

Alternatively, licensed moneylenders will provide you with a company bank account. You can deposit your payments using your mobile app or through a physical bank.

  • Do you pay two mortgages with a bridge loan?

Bridge loans can provide you up to 75% new house LTV capital. However, you’re making an impractical choice by using it as a mortgage because of its short loan repayment period.

Bridging financial products work best as down payment capital. Your old property net proceeds from the sale can pay for your bridge loan completely. Therefore, you’re not paying two mortgages with a bridge loan.

  • Is a personal loan useful as a bridging loan?

Personal loans offer six months of your salary and have the same interest rates as your bridging loan. Plus, it won’t use your property as financing collateral. Thus, you can use a personal loan if it has lower interest rates than bridging loans.

In addition, a personal loan’s total loan amount isn’t enough for luxury condominium down payment rates. A bridge loan can provide you home loan sums if you need them.

  • Are bridging financial products alternatives to a home loan?

A home loan helps homeowners pay their entire financing for decades. Alternatively, bridging finance can only pay for your initial purchasing costs. Thus, a home loan is still the best option to purchase a property.

Borrowers who can use a bridge loan to pay for 75% of the new property’s value will find it impractical. The loan gives you 6-12 months to pay for the loan with a 5-6% average interest rate.

It’s Easy to Find The Perfect Bridging Loan in Singapore

With bridge loans, you can:

  • Cut the waiting time between selling your old home and buying a new one
  • Pay up to 75% LTV of your new property
  • Pay for your new property’s down payment
  • And have more time to sell your old property

If you have yet to find a reliable bridging loan provider, you can always count on A1 Credit Solutions bridging loan. We can provide you the most effective bridging finance and other products you might need.

With decades of experience providing top-quality financing in Singapore, you can always count on A1 Credit to provide you with the best loan services and funding. Contact us today to learn more about everything that we can do for you.

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