Getting a bridging loan in Singapore is something some of us may have to consider when upgrading from an HDB flat to private 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 at the same time. We’ll cover what is a bridging loan and other important considerations.
What Is a Bridging Loan?
First thing’s first: What is a bridging loan? It is a short-term loan that you can take from the bank to ‘bridge’ the gap between when 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 when you could get a short-term loan from the bank (likely the same one that you’re getting your home loan from) to bridge this gap.
What to Know About Bridging Loans in Singapore
| Maximum amount | The amount is limited by the net proceeds and CPF balance from the approved sale of your old property. |
| Maximum tenure | Mandatory to be settled within 6 months |
| Interest rates | It varies depending on the bank but generally ranges from 5% to 6% p.a. |
You may have read elsewhere that bridging loans can be up to 20% of the property value (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.
How to Use a Bridging Loan in Singapore to Lower Your LTV Ratio
Consider this scenario: You’ve decided to sell your HDB flat 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 and a 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 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 in a lump sum payment.
Option two is to increase the loan quantum 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 loan, which in this case is to bridge both the downpayment and a part of the home loan. Of course, you will have to bear additional interest costs because of the higher quantum.
Is Taking a Bridging Loan in Singapore 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 questions below, 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, some nuances 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. 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. However, another option to consider would be taking a renovation loan for the property instead, which may be cheaper than a bridging loan in Singapore and also help preserve your cash reserves.
- Upgrading your property: This is the ‘classic’ scenario for short-term loans. 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 in Singapore, they do not have enough cash 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).
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.
3. What Are the Total Costs I Will Incur (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 loan of $300,000. Even assuming a 6% interest rate and a 6-month tenure, the total interest incurred would be $9,000. It’s not a trivial sum, but it’s relatively small compared to the property’s value.
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 ensure 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 in Singapore, 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 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.
