What Is A Bridging Loan, And Should I Get It?

Bridging loans can help you out when you’re in between selling and buying homes. 

You are about to sell your home, but you need to buy a new one first. What are your options? If you don't have the full down payment saved up yet, you may be wondering if a bridging loan is right for you. Here's what you need to know about bridging loans, and whether they are a good option for you.

A bridging loan is a short-term loan that can help you cover the gap between the sale of your old home and the purchase of your new one. Bridging loans typically have lower interest rates than payday loans or credit cards. They are usually available to people who are buying new homes while selling their previous homes, and who need extra cash to cover the down payments. 

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What is a bridging loan?

A bridging loan is a short term loan that you use to pay for your new property as you wait to sell your old one. The loan helps you pay off part of what's owed for a down payment and closing costs before receiving any proceeds from selling an old property. 

To help you bridge the gap between when your down payment is due and when you receive the sale proceeds, many banks offer a bridging loan. These loans last for less than one year and help homeowners to make their monthly payments. As a result, you don’t have to wait longer than necessary before moving into your new home. 

Types of bridging loans

Bridging loans can be a good option to get into your new home before you sell. You will have the choice of paying back either capitalised interest or simultaneous payments. We review both options so that it's clear which is right for you.

Capitalised interest loan

The bank pays for your new house and then allows you to start making payments once the sale of your old property is complete.

It’s important to note that the interest accrues over the entire period of the loan tenure. The repayment will cover the principal and interest for the period.

Simultaneous repayment bridging loan

If you opt for the simultaneous repayment bridging loan, you will make repayments for the bridging loan and the home loan. The bank will give you a specified timeframe to sell your property and pay off the loan.

Before you get the bridge loan, you must present the option to purchase document. Most banks, however, require you to show proof of the sale of the property before they can disburse the bridging loan. You must show that the sale is complete, and you are only waiting for the cash deposit into your account.

What you should know before you get a bridging loan

Here are some important things to know before applying for a bridging loan.

Your property will act as collateral

The bank will use your property as collateral when you apply for the bridging loan. It's therefore important to ensure that you can dispose of the property in good time or that you can repay the loan. Otherwise, you risk losing the property.

Property valuation

Make sure you are not overestimating the value of your property. Carry out a valuation of the property and make sure you have the right value. In this case, make sure you know the market value of your property.

If the value is miscalculated, you will have a hard time as you will need to raise more cash to settle the loan.

Before you sign on the dotted line, always make sure you have done your research on the cost of the bridge loan. Make sure you choose the cheapest bridging loan with no hidden fees.

How much can I borrow for a bridging loan?

Bridging loans cover the down payment you will need when purchasing your home. They cover the balance after you hit your loan to value (LTV) limit. That means you can borrow up to 25% when you apply for a bank loan.

For instance, if you want to buy a property which value is S$2,000,000, and you qualify for a 75% LTV, you can get a home loan of S$1,500,000 from the bank. The balance of 25% (S$500,000) is the down payment that you can get as a bridging loan.

Should I get a bridging loan?

Before taking out a bridging loan, be sure to assess whether it will serve your needs and if there are other options available for you. Here are a few things you should think about before taking out this loan.

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1. What is the cost I will incur when taking a bridging loan?

The tenure of these loans is typically very short, which means the interest rates will be high compared with other types of mortgages. The good thing about a bridging loan is that since the tenure is short, you will not pay a huge amount in interest accrued. 

You want to make sure that before taking out any money for one of these loans, calculate what it'll cost financially. Also check for any additional fees, such as processing fees, that you will incur.

2. What should I do if the sale of the property does not go through?

Before you opt for the bridging loan, check with your bank what options you have. Make sure you know the penalties and fees for taking this type of financing. Check the exit clause that may come into play should things go south during the property sale.

You should have a safety net in place just In case the sale does not go through. Most banks do wait until after the sale process has been completed before they disburse the money. Make sure you check the terms and conditions beforehand.

3. The bridge loan's interest

The interest rates on a bridge loan can be high, especially when compared to other loans. You should do your research and find out what the best banks offer before you apply for one.

Bridging loans are short-term, high-interest financial solutions. This type of loan serves some people well, but it may not work for your situation unless carefully reviewed.

Best bridging loans 

When it comes to bridging loans, there are reputable options for you to choose from. Here are the features of some of the best. 

DBS Bridging Loan 

• Short term loan of up to six months 
• Applicable for purchase of all property types 
• Interest rate pegged to Prime Rate 
• Only pay interest on bridging loan during loan period; make full payment upon receiving sales proceeds from property 

UOB Bridging Loan

• Short term loan of up to six months 
• Applicable for purchase of all property types
• Interest rate of between 4% to 5% 
• Repay principal amount in full after loan period using cash or CPF 

Standard Chartered’s HDB Bridging Loan 

• Short term loan of up to six months 
• Applicable for purchase of HDB flat (from HDB or resale market) 
• Interest rate of 3M SIBOR plus 2% p.a. 

Getting a bridging loan from the provider of your home loan helps to make your repayment process seamless and fuss-free. Check out our comparison of the best home loan deals and sign up for the one best suited to your needs!