What is A Bridging Loan?
This article discusses what a bridging loan is, how a bridging loan can help you lower your LTV ratio, and four important considerations to take out a bridging loan.
Throughout life, many people live in and own a number of different properties. For example, when you’re grown and get married, you at some point will likely buy your first home as a couple and it might be an HDB BTO flat. As the years go by your income will likely increase and you may start growing your family. When this happens, you may need more space and selling your HDB flat to move into a larger home would make sense.
This is when you might need a bridging loan to help you through the financial transition that occurs when buying and selling property.
This article discusses property bridging loans, which help people who are buying and selling property at the same time. These loans are not the same as what’s offered in the Temporary Bridging Loan Programme (TBLP), an initiative that helps businesses and organizations obtain working capital.
Bridging Loans – What Are They?
If you need a short-term bank loan to get you through the time gap between when you need to make your downpayment on a new property and when the sales proceeds come in from the sale of your previous property, you can apply to your bank for a bridging loan.
Let’s say that you’ve been looking for a larger home and have found one you want to buy and are ready to sign the Option to Purchase or Sales and Purchase agreement. At this point you would need to put a down payment on the property. However, you don’t have the money because you have not yet received the funds from selling your existing property. What can you do?
You can go to your bank, the one whose giving you your home loan, and apply for a bridging loan to “bridge” this time gap. The following chart outlines the parameters of bridging loans in Singapore:
Amount of loan is limited by the net proceeds and the CPF balances resulting out of the approved sale of your existing property.
It is mandatory that the loan be paid off within 6 months.
Varies depending on the bank, but they typically are from 5% to 6% p.a.
You may have been told that bridging loans cap out at 20% of the property value since they serve as the non-cash portion of the down payment on a non-HDB loan. This is correct to a certain extent as it is the most common practice.
However, as long as the proceeds from the sale of your existing property will cover the loan, you can get approved for that limit, and possibly use that to also obtain a lower Loan-to-Value (LTV) ratio.
How a Bridging Loan Can Help You Lower Your LTV Ratio
For purposes of this discussion, we’ll use the following scenario for a bridging loan from a private bank:
- Price of new property: $1,500,000
- Maximum loan amount: $1,125,000 at 75% LTV
- Non-cash down payment: $300,000
- Net sales proceeds from existing property: $800,000
You have not yet received the proceeds from the sale of the property you’re selling, so you don’t have the $800,000. Therefore, you can take out a bridging loan to cover the $300,000 non-cash portion of your down payment. Then take $75,000 from your savings account for the cash portion of the down payment, and with a bank loan of $1,125,000 you’re covered.
Once you repay your bridging loan out of your sales proceeds you will still have $500,000. If you would like to put that $500,000 towards your new property you could do either of the following:
- Take the full amount of your $1,125,000 bank loan and after the prepayment penalty period has passed make a lump sum payment of $500,000 on the loan.
- Increase the amount of your bridging loan to the full $800,000 rather than $300,000. With this, your home loan only needs to be $675,000, which is 45% LTV. After you receive the proceeds from your sale, you repay your bridging loan. In this case your bridging loan served to bridge your down payment as well as part of your home loan. However, you will need to pay more in interest on the bridging loan due to the higher amount.
Which is better – Capitalised Interest Bridging Loan or a Simultaneous Repayment Bridging Loan?
You may have heard that Singapore has two types of short-term bridging loans – the capitalised interest type and the simultaneous repayment type. While this may be true in theory, you do not need to be concerned about them in reality.
Because in Singapore, borrowers are required to repay their bridging loan in full within six months, which makes the difference between these two types irrelevant. So, you only need to decide between the two options discussed above, which are whether to only bridge your down payment or to also add a portion of your home loan.
Does it Make Good Sense to Take Out a Bridging Loan? Four Important Considerations
In deciding whether or not to take out a bridging loan, there are some important factors to consider. At first, it may seem like a simple decision. If you have sufficient funds to make the down payment on the property you’re buying, you don’t need one. But if you don’t have the funds to cover your down payment, then you would need a bridging loan.
This is true from a certain perspective however this simplistic rationale doesn’t tell you:
- Whether or not a particular bridging loan makes good sense for you
- Whether or not you should consider other options, even when you lack sufficient funds to cover your down payment
By answering the questions below, you may be able to evaluate your options better, leading you to a smarter decision.
Why am I considering a bridging loan?
Your reason may seem obvious, the bridging loan would cover your down payment on the property you’re planning to buy. But if we think about it, there are certain details that could make this loan either a good or bad idea.
Here are some examples:
En bloc sale
If the sale of your property is included in an en-bloc sale, you will likely need to find a new property in a hurry. In this case a bridging loan can be a big help. Because en bloc sales are very lucrative, paying the higher interest rate shouldn’t be a problem.
Sale of a recently upgraded property
If you’ve recently renovated a property that you now want to sell, your cash reserves may be depleted, which may mean a need for a bridging loan. But have you thought about taking a renovation loan instead? This may be less expensive than a bridging loan and keep you from depleting your cash reserves.
Upgrading your property
This is what people often use bridging loans for. And in most cases, it’s a good idea. But you need to first assess the details carefully, something we’ll discuss in the following questions:
How much cash do I have on hand?
Clearly, if you are seriously thinking about taking out a bridging loan, you do not have sufficient cash reserves to make the down payment on your new home. However, there are situations in which people would rather take a bridging loan than deplete their cash reserves in case of an emergency.
This makes sense if you want to hang onto your liquid cash balances, not the funds in your CPF OA (with stringent withdrawal conditions). Additionally, the interest rates on your CPF funds are far lower than those on a bridging loan. Therefore, if you have sufficient funds in your CPF for the down payment on your new home, it would be best to use your CPF funds rather than take out a bridging loan.
But, if you decide to hold onto your cash reserves for an emergency and instead opt to take out a bridging loan, you’re not making the wrong decision. It depends on your psychological makeup and your tolerance for taking risks. Just be aware that if you do take out a bridging loan you will be stuck with the interest costs, which leads us into our next question…
How much is the bridging loan going to cost me in total (in addition to my mortgage)?
One advantage of bridging loans is that while they do have a high interest rate, these are short-term loans. So, the total amount you will pay in interest is relatively small.
For example, If you are planning to buy a property costing $1,500,000 and got a bridging loan to cover the entire 20% down payment it would be for $300,000. Let’s say it has a 6% interest rate with a tenure of 6 months.
The total amount of interest you would pay on the loan would be $9,000. This is not a small amount, unless you compare it to how much the property’s worth.
Having said that, whether this is a lot of money or not will depend on the person. The point we want to make is the importance of doing the calculations before you decide. You need to know exactly how much you will pay in interest on the loan. Remember to ask about any other fees that could be added onto the interest costs.
Do I have a “Backup Plan” if the sale of my existing property falls through?
It’s important to have a backup plan just in case the worst happens, and your sale doesn’t go though. Speak to your banker about any “exit clauses” that could protect you in this case. Ask what the penalties would be, if any.
As discussed earlier, terms and conditions are going to vary depending on the bank. So, when deciding which bank to use and/or which bridging loan to opt for, use this information in your selection process.
Frequently Asked Questions (FAQs)
1. What exactly is a bridging loan?
A bridging loan is a short-term loan for the purposes of covering the down payment on a new property until funds are available from the sale of a previous property.
2. How much money can be borrowed with a bridging loan?
Borrowers can typically take out a bridging loan for the non-cash part of a down payment, which is a maximum of 20% with private bank loans. But in reality, you can obtain a bridging loan in an amount up to the net proceeds from the sale of your previous property if necessary. If you do that, you can actually use funds from your bridging loan towards a portion of your home loan.
3. Am I allowed to use CPF to repay a bridging loan?
Yes. Once your previous property is sold and you receive a refund on your CPF savings, those funds can be used to pay off your bridging loan. However, you need to service the interest with cash.
4. Which banks provide bridging loans?
Most banks that provide home loans typically provide bridging loans as an additional offering. All three local banks in Singapore offer their clients bridging loans. Therefore, you can take your pick from a DBS, OCBC, or a UOB bridging loan.
5. Are bridging loans difficult to get?
If you are approved for a home loan from a bank and buyers have already exercised their option to buy your previous property, you will most likely have no trouble being approved if you need a bridging loan.
6. How long does it take to get a bridging loan?
It varies depending on the bank. It also depends on where your application stands in the approval process for your home loan.
Still Not Sure About Which Home Loan Option to Choose?
If you really do not know which home loan option to choose because you’re not sure which one would be best for you, you probably need to speak with a professional one-on-one. We invite you to click on Contact Pinnacle and one of our friendly mortgage partners will be happy to answer your questions and give you their best advice. In the meantime, we have compiled Singapore Property Guides that should be able to answer any other questions.
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