In our lifetime, many of us will own more than one property. For example, you might buy a Housing & Development Board (HDB) Build-To-Order (BTO) flat as your first home when you get married. A few years later, as your income increases, you might decide to sell your HDB flat and upgrade to a condominium.
This is where a Bridging Loan might come in handy, helping to ease the financial transition when you’re buying and selling properties.
Note: This article discusses “Bridging Loans” for property transactions, which help homeowners and buyers manage the process of buying and selling properties concurrently. It should not be confused with the “Temporary Bridging Loan Programme (TBLP),” which is an assistance measure to help businesses obtain financing.
What is a Bridging Loan?
A bridging loan is a short-term loan you can obtain from a bank to meet your financial needs during the “transition period” between paying the downpayment for your new home and receiving the sales proceeds from your old one.
Suppose you are upgrading your property and have reached the stage of signing the sale and purchase agreement. This means you need to make the downpayment. But what if you don’t have the cash on hand, and you haven’t received the funds from selling your old house yet?
In this situation, you can obtain a bridging loan from a bank (possibly the same one that provides your mortgage) to cover the funding gap.
Here is some basic information about bridging loans in Singapore:
| Bridging Loan | |
| Maximum Loan Amount | The loan amount is limited by the net proceeds from the sale of the old property and your Central Provident Fund (CPF) balance. |
| Loan Tenure | Must be repaid within 6 months. |
| Interest Rate | Varies by bank, but generally ranges from 5% to 6% per annum. |
You may have heard elsewhere that the maximum bridging loan amount is 20% of the property value (i.e., the non-cash portion of the downpayment for a non-HDB loan). Indeed, this is the most common scenario in practice.
In reality, as long as the sales proceeds from your previous property can cover the loan, you can be approved for that amount—and even use it to obtain a lower Loan-to-Value (LTV) ratio.
How to Use a Bridging Loan to Lower Your Loan-to-Value Ratio
Consider the following bank loan scenario:
New property price: $1,000,000
Maximum loan amount: $750,000 (75% LTV)
Non-cash downpayment: $200,000
Total net proceeds from the sale of the old property: $500,000
Remember, you have not yet received the $500,000. But you need to pay the seller of the new property. In this situation, you can apply for a $200,000 bridging loan to cover the non-cash portion of the downpayment, use $50,000 of your own funds for the cash downpayment, and a $750,000 bank loan will cover the rest. After you use the sales proceeds to pay off the bridging loan, you will still have $300,000 remaining. What if you want to use this $300,000 for your new property as well?
You have two options.
The first option is to take the full $750,000 loan and, after the prepayment penalty period ends, make a lump-sum repayment of $300,000.
The second option is to increase the bridging loan amount 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. In this case, the bridging loan covers the gap for both the downpayment and part of the mortgage. Of course, due to the higher bridging loan amount, you will have to bear additional interest costs.
Capitalised Interest vs. Simultaneous Repayment Bridging Loans
You may have also heard that there are two types of temporary bridging loans in Singapore—Capitalised Interest and Simultaneous Repayment bridging loans. While they exist in theory, in practice, you don’t need to worry about the distinction between them.
Why? Because in Singapore, you must repay the bridging loan amount within six months—which makes the difference between the two irrelevant. In practice, you only need to be concerned with the two options mentioned above: do you want the bridging loan to cover only the downpayment, or also a portion of the home loan?
Is a Bridging Loan a Good Idea? Four Things to Consider
Alright, now it seems that deciding whether to take a bridging loan is straightforward. If you have enough funds to cover the downpayment on your new home, you don’t need a bridging loan. If you don’t have enough cash on hand, then you do.
From a general perspective, this is true. However, the following questions remain unanswered:
- Is a bridging loan a good idea for you personally?
- Should you consider other options (even if you don’t have enough funds for the downpayment)?
You can ask yourself the following questions to better understand how to evaluate your options—and make a better decision.
1) Why do I need a bridging loan?
On the surface, the answer seems self-evident—of course, it’s to pay the downpayment on the new house. However, if we dig a little deeper, we find some nuances that could make a bridging loan either a good idea or a “bad one.” For example:
En bloc sale: If you are lucky enough to sell your home in an en bloc sale, you may need to buy a new home quickly. A bridging loan can help—since the proceeds from an en bloc sale are substantial, the higher interest rate won’t be too much of a burden.
Selling a newly renovated property: In this case, renovation costs may have depleted your cash reserves, so you would need a bridging loan. However, another option to consider is applying for a renovation loan for this property, which might be more cost-effective than a bridging loan and could help preserve your cash reserves.
Upgrading your property: This is the “typical” use case for a bridging loan. In most cases, a bridging loan can solve your immediate needs. But be sure to evaluate all the details first, which we will cover in the subsequent questions.
2) How much cash do I have on hand?
Obviously, if a person is considering a bridging loan, it’s because they don’t have enough cash on hand to make the downpayment. However, in some cases, some people might prefer to “preserve” their cash with a bridging loan (e.g., as an emergency fund) and use the loan instead.
Of course, this only makes sense if you are preserving “cash on hand” rather than funds in your CPF Ordinary Account (which has strict withdrawal conditions). Additionally, your CPF interest rate is much lower than that of a bridging loan. This means that if you have funds in your CPF that can be used for the downpayment, you should use your CPF instead of a bridging loan.
Ultimately, there’s nothing wrong with preserving “cash on hand” and opting for a bridging loan instead (it all depends on your own mindset and risk tolerance). But remember that by doing so, you will have to bear the interest costs of the bridging loan. This brings us to the next question, which is—
3) What is the total cost of this bridging loan (on top of my mortgage)?
The advantage of a bridging loan is that while the interest is high, the tenure is short. This means the total interest you will pay is relatively small (especially since we are talking about a loan for buying a house).
For example, let’s say you buy a property worth $1.5 million and take a bridging loan for the entire 20% downpayment—that is, $300,000. Even with an interest rate of 6% for a 6-month term, the total interest incurred would be just $9,000. While this amount is not insignificant, it is relatively small compared to the value of the property.
That said, whether this amount is considered substantial is purely subjective. The important thing is to do the calculations beforehand to ensure you know exactly what the additional interest cost will be. In addition to the interest cost, don’t forget to check for any miscellaneous fees.
4) Do I have a “backup plan“ if the sale of my old property falls through?
This situation could be a nightmare. However, it’s always good to be prepared. Before applying for a bridging loan, be sure to confirm with the bank—if for whatever reason the sale of your old property does not go through—what the “exit clauses” are. Will there be any penalties?
As mentioned earlier, the terms and conditions may vary from bank to bank. Therefore, be sure to ask your bank carefully and take this into consideration when you make your loan decision.
Frequently Asked Questions (FAQ)
• What is a bridging loan?
A short-term loan used to pay the downpayment on a new property before the sale of an old property is completed and funds are received.
• How much can I borrow with a bridging loan?
Typically, you can use a bridging loan to cover the non-cash portion of the downpayment—20% for a bank loan. However, if you wish, you can obtain a bridging loan for an amount up to the net proceeds from the sale of your old property. In this case, you can even use the bridging loan for part of your home loan.
• Can I use my CPF to pay for a bridging loan?
Yes. Once the sale of your old property is complete and your CPF savings are refunded, you can use those funds to repay the bridging loan. However, the interest must be paid in cash.
• Which banks offer bridging loans?
Most banks that offer home loans also provide bridging loans as a supplementary product. The “big three” banks in Singapore all offer bridging loans. This means you can choose from OCBC Bank (OCBC), United Overseas Bank (UOB), or DBS Bank (DBS).
• Am I eligible for a bridging loan?
As long as you are eligible for a home loan from a bank and have an exercised Option to Purchase for the sale of your old property, you are likely to be approved for a bridging loan.
• How quickly can I get a bridging loan?
This varies by bank and also depends on the current stage of your mortgage approval process.
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