In our lifetime, many of us will own and live in more than one property. For example, when you get married, you may buy an HDB BTO flat as your first home. In a few years, as your income increases and your family welcomes new members, you may decide to sell your HDB flat and upgrade to a more spacious property or a private property.
This is where bridging loans come in, to ease the financial transition when you buy and sell property. Ready to get started? Read on or jump ahead to select parts of the article:
- What Is a Bridging Loan?
- How to Use a Bridging Loan to Lower Your LTV Ratio
- Is Taking a Bridging Loan a Good Idea? 4 Important Considerations
Note: This article covers property bridging loans, which help homeowners and buyers when they sell and buy property simultaneously. This is not to be confused with the Temporary Bridging Loan Programme (TBLP), which is an initiative to help enterprises access working capital.
What Is a Bridging Loan?
A bridging loan is a short-term loan that you can take from the bank to ‘bridge’ the gap between the time you need to pay the downpayment for your new property and when you receive the sales proceeds from your previous property.
Say you’re looking to upgrade your property and have already proceeded all the way up to the signing of the Sales and Purchase agreement. This means you’ll need to remit the downpayment. But what happens if you don’t have the cash on hand and you’ve yet to receive the funds from the sale of your old property?
That’s where you could get a bridging loan from the bank (likely the same one that you’re getting your home loan from) to bridge this gap.
Capitalised Interest Bridging Loan Vs Simultaneous Repayment Bridging Loans
Now, you may have also read elsewhere that there are two types of temporary bridging loans in Singapore – the capitalised interest bridging loan and the simultaneous repayment bridging loan. While these exist in theory, you have no need to worry about them in practice.
Why? Because in Singapore, you are mandated to repay the bridging loan amount within six months – making the difference between the two structures irrelevant. In practice, you only need to concern yourself with the two options presented above: do you want to bridge just the downpayment or include a portion of the home loan as well?
What to Know About Bridging Loans in Singapore
|Maximum amount for bridging loan||Amount is limited by the net proceeds and CPF balance from the approved sale of your old property.|
|Maximum tenure of bridging loan||Mandatory to be settled within 6 months|
|Interest rates||Varies depending on bank, but generally ranges from 5% to 6% p.a.|
You may have read elsewhere that bridging loans have a maximum amount of 20% of the property value (being the non-cash downpayment portion of a non-HDB loan). That is indeed the most common scenario in practice.
But in actuality, as long as the sales proceeds from your previous property can cover it, you can get that limit approved – and even use it to get a lower Loan-to-Value (LTV) ratio as well.
How to Use a Bridging Loan to Lower Your LTV Ratio
Consider this scenario: you’ve decided to sell your HDB flat while prices are at a record high and upgrade your property. You buy a new launch condo for $1,000,000, and take a bank loan of $750,000 (assuming 75% LTV, non-cash downpayment of $200,000). The total net sales proceeds from your previous property amount to $500,000.
Remember, you haven’t received the $500,000 yet. But you do need to pay for your new property. In this case, you can take a bridging loan of $200,000 to cover the non-cash downpayment, add in $50,000 of your own funds for the cash downpayment, and the bank loan of $750,000 will cover the rest. But you’ll still have an excess of $300,000 left over after you repay the bridging loan from the sales proceeds.
What if you want to put that $300,000 toward your new property as well? Then, you have two options. The first is to take the full $750,000 loan, wait until the prepayment penalty period is over and then repay $300,000 of the loan in a lump sum payment.
Option two is to increase the quantum of the bridging loan to $500,000 instead of $200,000. Now, you only need to take a home loan of $450,000 (45% LTV). Once you receive the sales proceeds, you can repay the bridging loan, which in this case is to bridge both the downpayment and a part of the home loan as well. Of course, you will have to bear additional bridging loan interest costs because of the higher quantum.
Is Taking a Bridging Loan a Good Idea? 4 Important Considerations
Now, it might seem that whether you should take a bridging loan is a simple open-and-shut case. If you have enough funds to cover the downpayment on your new property, you don’t need a bridging loan. If you don’t have enough cash, then you might need one.
That is indeed true from a high-level perspective. But it doesn’t help you answer:
- Whether a specific bridging loan is a good idea for you
- Whether you should be considering other options (even if you don’t have enough funds to cover the downpayment)
But by asking yourself the below questions, you will hopefully gain a better understanding of how to evaluate your options – and make a better decision.
1. Why Am I Taking a Bridging Loan?
On the surface, this seems obvious – it’s to cover the downpayment of a new property, of course. But if we dive deeper, there are nuances that could make a bridging loan a better (or worse) idea. Examples:
- En bloc sale: If you are lucky to have your property sold as part of an en bloc sale, you may need to secure a new property quickly. A bridging loan can help – and since en bloc sales are quite lucrative, the higher interest rate will be less of a burden.
- Selling newly renovated property: In such a case, the renovation costs may have depleted your cash reserves, creating the need for a bridging loan. However, another option to consider would be taking a renovation loan for the property instead, which may be cheaper than a bridging loan, and also help preserve your cash reserves.
- Upgrading your property: This is the ‘classic’ bridging loan scenario. In most cases, bridging loans can help. But be sure to evaluate all the details first, which we will cover in the subsequent questions.
2. How Much Cash on Hand Do I Have?
Obviously, if someone is considering a bridging loan, they do not have enough cash on hand to service the downpayment. However, there may be scenarios where someone would prefer to take a bridging loan to ‘preserve’ their cash (e.g. for emergencies) and take a bridging loan instead.
Of course, this only makes sense if you are preserving your liquid ‘cash on hand’ balances, rather than the funds in your CPF OA (which have strict withdrawal conditions). Further, the interest rates on your CPF funds are much lower than a bridging loan. This means that if you have the funds in your CPF to cover the downpayment, you should use the CPF funds instead of taking a bridging loan.
Now, preserving your ‘cash on hand’ and taking a bridging loan instead is not wrong (it all depends on your own psychology and risk tolerance). But do keep in mind that by doing so, you will have to incur the interest costs of the bridging loan. This brings us to the next question, which is…
3. What Are the Total Costs I Will Incur From Taking This Bridging Loan (on Top of My Mortgage)?
The good thing about bridging loans is that, although the interest is high, the tenure is short. This means the total amount of interest you will pay is relatively small (especially when considering we’re talking about property here).
For example, let’s say you were buying a $1,500,000 property and took out a bridging loan for the full 20% downpayment – $300,000. Even assuming a 6% interest rate and a 6-month tenure, the total interest incurred would be $9,000. Not a trivial sum, but relatively small compared to the value of the property.
That said, whether this is a significant amount or not will vary from person to person. The important thing is to do the calculation beforehand to make sure you know exactly how much the additional interest will cost you. Don’t forget to also check for any miscellaneous fees on top of the interest costs.
4. What Is My Plan B If the Sale of My Old Property Doesn’t Go Through?
This can be a nightmare scenario. But it’s always better to be prepared. Before taking on a bridging loan, make sure you check with your banker what the ‘exit clauses’ are if, for whatever reason, the sale of your old property doesn’t go through. Will there be any penalties?
As we mentioned, the terms and conditions will likely vary from bank to bank. So make sure you double-check with your banker and incorporate these into your loan selection decision.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.