HDB resale prices rose up 2.4% for the 10th consecutive quarter in 3Q2022, according to HDB flash estimates. This increase was fueled by the influx of private property downgraders purchasing HDB resale flats. On top of that, there was also pandemic-related disruption in the construction sector which further resulted in a price increase.
So what does this mean for homeowners looking for their next property? With the rising prices and interest rates, all homebuyers will be affected. Selling an old property and buying a new one will cost a lot more.
Whether you’re planning to upgrade or downgrade your property, what are your options for financial assistance? One of the most viable options is a bridging loan.
What Is the Purpose of a Bridging Loan?
A bridging loan is a short-term loan that reduces the financial burden of buying and selling a property simultaneously. Banks offer bridging loans to “bridge” the gap between the time you need to pay the downpayment of your new property and when you receive the sales proceeds of your old home.
Say you’re downgrading your property and finally found one that will suit your needs. If you want to secure the listing before anyone else does, you need to remit the downpayment. But what happens if you don’t have enough cash on hand and have not received the funds from the sale of your old property?
That’s where you can take out a bridging loan from the bank or licensed money lender. A bridging loan is useful when you need to meet current obligations while waiting to secure permanent financing.
How Does a Bridging Loan Work in Singapore?
Let’s consider this illustration:
Assuming you are in the process of selling your existing condominium to purchase an HDB resale flat with a purchase price of S$732,000. However, you will only be receiving the sales proceeds of your old property in 6 months. On top of that, your next HDB loan is still pending approval.
To finance the purchase of a S$732,000 HDB resale flat:
|
Downpayment (5% Cash) |
5% x S$732,000 = S$36,600 |
|
Downpayment (20% cash and/or CPF) |
20% x S$732,000 = S$146,400 |
|
Loan amount (assumes maximum 80% LTV) |
80% x S$732,000 = S$585,600 |
In this scenario, let’s assume that you have already paid the 5% down payment in cash. However, you haven’t paid the next downpayment of S$146,000 because your funds are tied up in your old property.
This is where a bridging loan comes in to help. You can take up a bridging loan of S$146,000 to make up for the shortfall.
Types of Bridging Loans in Singapore
There are two primary types of bridging loans in Singapore – Capitalised Interest Bridging Loans and Simultaneous Repayment Bridging Loans.
- Capitalised Interest Bridging Loan: This type of bridging loan covers the full amount of the new property you plan to purchase. The loan repayment will start only after your current property has been sold and interest will accrue throughout the loan tenure.
This means you will cover the entire principal amount plus interest. With this type of bridging loan, you don’t have to pay two loans at the same time.
- Simultaneous Repayment Bridging Loan: As the name suggests, you will be simultaneously repaying your home loan and bridging loan. You have a time frame of 12 months, during which you need to sell your current property and repay the loan.
Note that these types of bridging loans do not apply to licensed money lenders in Singapore.
Additionally, do not confuse HDB bridging loans with the Temporary Bridging Loan Programme. The latter is designed for SMEs to provide them access to working capital for their business needs. In this article, we will be focusing on the HDB bridging loan.
What Can Bridging Loans Be Used For?
The most common way to use a bridging loan is to cover the down payment of your new property. However, it can also be used for different things:
- If you are renovating, converting, or restoring properties: You can use a bridging loan to restore or improve a property in poor condition. You can then sell the newly renovated property in the market for a substantial profit.
- Buying an auctioned property: You may also be interested in buying auctioned properties. To complete the transaction, the winning bidder needs to pay a 10% deposit. You can fund the payment by taking out a bridging loan.
- Preventing property foreclosure: You can also use a bridging loan to pay off the mortgage and prevent a property from being repossessed. This allows you to retain control of the property and sell it on your own terms.
- Buying a property at lower prices: If you find a property that is selling at a much lower price, you can move quickly and swiftly to close the deal using a bridging loan. Once you secure the bargain property, it can then be sold at a profit.
Pros and Cons of Taking A Bridging Loan
Just like any type of financing, bridging loans come with a few advantages as well as risks. Here are some of the reasons why a bridging loan is a good idea:
- Quick Funding: Bridging loans usually offer faster approval times than other types of short-term financing. Typically, you can get the funds within 24-48 hours. If you’re borrowing from a licensed moneylender, you can get your bridging loan within an hour.
- Generous Loan Amount: You can borrow a large sum of money since the loan is secured against your current property.
- Flexible Lending Criteria: Most traditional bridge loan lenders will focus more on the value of the collateral, in this case, your property. That said, they won’t focus so much on traditional loan criteria, such as income and credit history.
What are the risks of a bridging loan?
- It Requires Collateral: One of the biggest risks of a bridging loan is the possibility of losing your property if you default on your loan repayments.
- Higher Interest Rates: Bridging loans have higher interest rates of between 5% and 6% compared to home loans with most banks charging below 2%.
- Additional Fees and Charges: Just like other types of financing, you will also need to pay extra fees and charges, such as exit fees and arrangement fees.
Things To Consider When Taking a Bridging Loan
Taking up a bridging loan for your next property purchase is a huge decision. Remember, this type of loan is a secured debt so your property will act as collateral. That said, you need to make sure that you can make timely loan repayments.
Here are a few things you need to consider:
- How much do you need? Before taking up a bridging loan, consider how much cash you have available. Borrow only what you need. Additionally, note that interest rates on CPF funds are usually lower than on traditional bridge loans.
- Can you manage the loan repayments? Since it is a short-term loan, you will be required to repay it within a short period – typically within six months or less. Consider whether the repayment costs are affordable for you and whether you can make the monthly payments and interest.
- What are the risks involved? Before you move forward with your application, make sure you are comfortable with the level of risk involved. As previously mentioned, bridging loans use your property as collateral.
If in the event your current property does not sell and you decide not to proceed with the loan, there will be an exit clause made by the bank. Typically, you’ll have to pay a penalty. So before signing a bridging loan contract, check the exit terms and conditions.
Top Banks Offering Bridging Loans in Singapore
Most major banks in Singapore that offer home loans also offer bridging loans for their clients. Take a look at the table below:
|
|
DBS Bridging Loan |
Standard Chartered’s HDB Bridging Loan |
UOB HDB Home Loan |
Maybank HDB Home Loan |
OCBC Home Loan |
|
Interest rate |
Prime rate |
3-Months Sibor + 2% annual interest |
4% to 5% |
1.4% to 1.6% |
1.55% p.a |
|
Tenure |
Up to 6 months |
Up to 6 months |
Up to 6 months |
1-4 years |
Up to 6 months |
|
Property type |
All property types |
HDB |
HDB |
HDB |
All property types |
Most of the bridging loans offered by banks have a maximum loan repayment period of up to 6 months. However, they differ in interest rate charges as well as the type of property you can use the bridging loans.
Consider these factors to make informed financial decisions.
Alternative Bridging Loan Option: Licensed Moneylender
What if a traditional bridging loan with banks is not available to you? You may take up a loan with a licensed moneylender in Singapore. Licensed lenders are registered with Singapore’s Ministry of Law and they abide by the rules and regulations stipulated in the Moneylenders Act.
With a licensed moneylender, the interest rate is capped at 4% per month. This cap applies regardless of your income or loan amount.
|
Minimum Income |
Loan Amount |
Interest Rate |
Loan Tenure |
|
Singaporean or Permanent Resident: S$1,500 |
Depending on your annual income. Loan amount from $3,000 or up to 6x monthly salary |
1%-4% |
Up to 1 month only or until the property’s completion date |
Best of all, licensed moneylenders have less stringent requirements. Most lenders do not require a credit score and they offer fast cash disbursal- usually within an hour after your application is approved.
Before you take up a bridging loan with a licensed moneylender, make sure to verify their credibility and license. Visit the Ministry of Law’s website and check if the moneylender is listed in the complete list of licensed moneylenders.
How To Apply
The eligibility criteria and document requirements may vary depending on the bank and financial institutions. However, here are some of the most basic qualifications for most major banks:
Eligibility:
- Age: At least 21 years old
- Minimum Annual Income:
- Singaporean or Singapore Permanent Residents: S$30,000
- Foreigners who are in the process of selling their property in Singapore can also apply for a bridging loan
Document Requirements
- Option to Purchase (OTP) document
- In-principle approval letter from HDB
- Letter of authorization to HDB
- CPF withdrawal statement
- Outstanding bank loan statements
To learn the complete list of required documents, it’s best to visit your bank of choice.
Eligibility and Requirements: Licensed Moneylenders
Eligibility:
- Age: Must be at least 18 years old
- Minimum Income:
- Singaporean or Singapore Permanent Residents: S$1,500
- You should have exercised the Option to Purchase (OTP)
Requirements
- Copy of NRIC or passport for foreigners
- Proof of residence
- Copy of the OTP
- Proof of income and employment
- SingPass to log in to CPF, IRAS, and HDB websites
Closing
With the rising costs of HDB resale flats, it’s not surprising for homebuyers to seek short-term financing to ease the burden. For such cases, you can take up a bridging loan to get the necessary funds to cover the new HDB downpayment while you wait for your current property to sell.
Key Takeaways:
- A bridging loan is useful when you need to meet current obligations while waiting to secure permanent financing.
- There are two primary types of bridging loans in Singapore – Capitalised Interest Bridging Loan and Simultaneous Payment Bridging Loan.
- You can also use bridging loans for other goals, such as buying auctioned property or preventing property foreclosures.
Need extra funds to finance your goals? A reliable and credible licensed moneylender, such as Bugis Credit, can provide you with quick and hassle-free financing. Established in 2007, Bugis Credit offers tailored bridging loan packages at affordable interest rates. Request a free, no-obligation quote today!
