Check out how this short term loan could help you make large sum payments easily — plus a number of things you should always look out for before taking the plunge.
Save for the 1 per cent of us, we mere mortals are probably very familiar with the concept of getting a home loan to help pay off our property purchase. But did you know there’s also a different type of home loan on the market that you may not know about: Bridging loans.
Yes, to reiterate, there are home loans and then there are bridging loans.
For those of us who are selling off our current home and need help financing our next property purchase, a bridging loan will help make up for the shortfall, particularly if a large amount of cash is involved.
But hey, before you go ahead and explore what’s out there, it’s important to note that you should apply for a bridging loan at the same bank from where you got your mortgage.
- What’s a bridging loan?
- When should you get a bridging loan?
- What to consider when applying for a bridging loan?
- Types of bridging loan
- Which banks offer bridging loans?
- Top bridging loans in Singapore
What is a bridging loan?
As the name suggests, a bridging loan gives you the money you need in your next home purchase, even if you’re still waiting for the sales proceeds from your current home.
Let’s take a look at the following cost breakdown as an example.
Let’s say you’re buying a newly launched condo valued at $1,000,000.
In this scenario, you’ve already paid the 5 per cent down payment in cash. However, you can’t say the same for the next downpayment of $200,000 (20 per cent of the purchase price) as your money is still tied up in your existing home. To top it all off, your next property loan is still pending approval.
Unless you happen to have a quarter of a million dollars at your disposal, this is where a bridging loan comes in to help front that hefty 20 per cent payment.
Now let’s assume that the bank offers a loan-to-value (LTV) ratio of 75 per cent of the new property’s purchase price. This means you can borrow a maximum of $750,000, more than enough to tide you over until you can get your hands on the proceeds once your proceeds roll in.
With a successfully applied bridging loan in the books, you can complete the downpayment by borrowing the shortfall of $200,000.
When should I get a bridging loan?
As we have seen in the above example, the people who opt for a bridging loan usually intend to upgrade from an HDB flat to a private property due to the considerably large down payment. However, this does not mean that bridging loans are only available for private property buyers. You can also get a bridging loan if you’re buying an HDB flat as well.
What are the factors to consider when getting a bridging loan?
Notorious for being an expensive loan, don’t be surprised if you find the interest rate to be higher than usual home loan rates. They typically range from 5 per cent to 6 per cent p.a., pretty steep considering that the highest home loan interest rate on Singsaver is at 2.15 per cent p.a.
However, depending on the bank, you can pay off the interest first and pay off the bridging loan only once you’ve collected your sales proceeds on the house.
This is where you should take the time to sit down, crunch the numbers and decide if it’s feasible to take up a bridging loan and the repayments that come with it.
Do you have sufficient savings set aside in the event that your income comes to a standstill? It is imperative that you’re able to afford the repayments, on top of the mortgage for your new home, as you may put your abode at risk.
It’s important to know that the standard bridging loan should finance only up to 25 per cent of your new home’s purchase price and not the entire amount.
Looking at the high interest rate and short loan tenure, it’ll make the most financial sense to borrow the amount you absolutely need to cover the downpayment and complete your property transaction — and not a penny more.
As bridging loans are essentially short term loans, you would usually have up to 6 months to repay the loan. The tenure varies depending on the bank you’re borrowing from. Be aware of the amount you’re borrowing and the interest rates as the brief tenure can rack up monthly loan repayments quite significantly.
Going forward with getting a bridging loan means you’ll have to be comfortable with a certain level of risk. In most cases, bridging loans use your property as collateral.
In addition, you are getting a large loan before receiving the proceeds of your property sale. What’s more, there’s also the higher than usual interest rate and the very short timeframe in which to fully repay the amount borrowed.
What are the types of bridging loans available?
There are two main types of bridging loans you can find on the market: capitalised interest bridging loan and simultaneous payment bridging loan.
Capitalised interest bridging loan
For this bridging loan, the bank will pay the entire purchase of your new house. Mortgage repayments will only kick in once your old house is sold. This is best if you don’t want to service two loans at the same time.
Simultaneous payment bridging loan
This option allows you to pay off the home loan for your new home and the bridging loan in tandem. You have 12 months to complete the sale of your old property and commence your loan repayment. It is arguably the more tedious option of the two.
Which banks offer bridging loans?
Banks in Singapore that offer home loans would also provide bridging loans as an option for you — an option you should never take lightly, as we’ve seen from this article. The usual suspects include (but are not limited to) DBS, Standard Chartered, UOB, and Maybank.
Top bridging loans in Singapore to consider
Keep in mind that you would normally get a bridging loan from the same bank that is currently providing your home loan.
Nevertheless, we’ve found some of the best bridging loan packages out there and compared them to help you make an informed financial decision moving forward.
|DBS Bridging Loan||Standard Chartered’s HDB Bridging Loan||UOB HDB Home Loan|
|Interest rate||Prime rate||3M Sibor + 2 per cent p.a.||4 per cent to 5 per cent|
|Tenure||Up to 6 months||Up to 6 months||Up to 6 months|
|Property type||All property types||HDB||HDB|
This article was first published in SingSaver.com.sg.