You may find yourself in a tight financial spot when buying a new property before selling your existing one. A bridging loan is a possible solution, offering temporary financing to help you close the monetary gap while transitioning between homes. This article will cover everything you need to know about bridging loans from what they are, how they work, the types available, to what you should consider before applying. This will better equip you to make a more well-informed decision on whether a bridging loan is suitable for your next property move.
What Is A Bridging Loan?
A bridging loan is a short-term financing option that helps buyers of properties manage the timing gap between selling an existing property and purchasing a new one. Bridging loans are offered for both HDB and private properties and they cover your downpayments before the funds from your current property sale become available. This loan is usually taken from the same bank providing the new home loan as it ensures a smooth transition in your property transaction. Bridging loans generally have a short repayment period of under a year and are offered only if you have a property to sell and buy.
What You Should Know Before You Get a Bridging Loan
It is important to understand the key considerations before applying for a bridging loan to ensure that you are eligible and that it fits your financial plan and property timeline.
Eligibility
To qualify for an HDB bridging loan, you must be at least 18 years old, be a Singaporean or Permanent Resident. You must meet a minimum monthly income requirement of S$1,500 for Singaporeans and S$2,000 for foreigners. Additionally, the Option to Purchase must already be exercised and of course, a good credit score is needed to get approval for the loan. Documents for this information will be required as proof for verification.
Collateral
Bridging loans are secured loans and typically, by the asset the loan is used for. Hence, your property will act as collateral for the bridging loan. This means that if you default on repayments, you risk losing your property. This is to ensure timely repayments.
Property Valuation
It is important to acquire an accurate valuation of your current property from a property valuation company. Overestimating its value may affect your financial plan if the sale proceeds fall short as you may need additional funds to cover the loan.
Loan Repayment
The repayments for the bridging loan will only start after the sale of your existing property.
You can use your CPF savings to repay a bridging loan once the sale proceeds from your previous property are in your CPF account. However, the interest on the bridging loan must be paid in cash. Bridging loans have higher interest rates than CPF accounts, so if you have sufficient CPF savings for the downpayment, using them directly may be more cost-effective than taking a bridging loan.
Tenure and Interest Rates
Bridging loans have a short tenure of around six months, and interest rates range from 3% to 5% p.a. It is good to compare rates and terms to find the best option for yourself without hidden fees.
How Much Can I Borrow For a Bridging Loan?
Amounts are mostly limited by the net sale proceeds and your CPF balance from your current property. This mostly covers around 20% of the property’s value or the non-cash downpayment. As long as the proceeds from the sale of your current property can cover it, the limit will be approved.
Here’s a simple example:
If you are buying a property valued at S$1,000,000 and you qualify for a 75% LTV, you can apply for a home loan of S$750,000 from the bank. The balance of 25% (S$250,000) is the downpayment, which you can apply as a bridging loan.
Should I Get a Bridging Loan?
Before applying for a bridging loan, it is wise for you to weigh the costs, terms, and risks. Since bridging loans are short-term, they often come with high interest rates, despite it being manageable due to the short tenure. Hence, it is important to ensure that the total costs are within your financial means, including any processing fees, and understand any penalties or exit clauses in the event your property sale doesn’t go through.
You will also need to have contingencies prepared if the sale falls through, as some banks only disburse the loan once the sale is finalized. Comparing bridging loans offered across banks can help you find the most favorable terms.
Bridging loans are specifically offered to cover downpayment gaps when moving between properties. They should only be considered if they fit comfortably within your finances. If you are still unsure about whether a bridging loan is your best option, it is advisable to consult with a mortgage advisor at Redbrick to help you understand better what suits your finances best.
