Bridge loans and mortgages might seem synonymous, but they serve distinct purposes in the real estate industry. Unlike a typical mortgage which is structured to finance the purchase of a home over a long duration, a bridge loan is designed to obtain short-term financing. The latter is a great option if you want to buy a new house but haven’t sold your current property.
As borrowers grapple with larger monthly repayments due to rising mortgage interest rates, according to a report from The Straits Times, people need to be mindful of these significant hikes. For individuals finding themselves caught in this upsurge, a bridge loan can provide much-needed relief.
This type of short-term financing can help ensure homeowners that they are well-equipped to handle their monthly home loan commitments while also offering the flexibility to invest in new property even if their current one hasn’t been sold. Here, we will delve into what a bridging loan in Singapore is, how it works, as well as the pros and cons to help you make an informed choice.
What Is a Bridge Loan in Real Estate?
Forbes describes a bridge loan as a form of short-term financing, allowing borrowers to access funds quickly, typically for durations not exceeding a year. Also known as bridge financing, interim financing, or gap financing, it is not meant to be a permanent financing or a long-term financing option, such as a home loan.
This type of loan becomes particularly beneficial for those who need to buy a new property but haven’t yet completed the sale of their current residence. Most importantly, it provides homeowners and real estate investors with immediate funds so they don’t miss out on a potential property opportunity due to a lack of cash.
How Does a Bridge Loan Work?
Let’s assume you’ve found a new property and have signed the Sales and Purchase Agreement – a binding contract between you and the seller. This means you’re now bound to remit the down payment for the property, but here’s the problem: the funds from the sale of your current property are still tied up.
In such cases, banks – typically the same financial institution from which you are taking out a home loan- offer bridging loans. Some homeowners may also take out a bridge loan from licensed money lenders in Singapore.
There are two primary types of bridging loans in Singapore:
- Capitalized Interest Bridging Loan: This is a more forgiving option for many buyers. It offers the flexibility to cover the full amount of the new property and allows for repayment to begin only after the sale of the current residence. This structure means homeowners aren’t burdened with paying off two loan monthly payments simultaneously.
- Simultaneous Repayment Bridging Loan: Homeowners are required to make mortgage payments along with the bridging loan repayments, which can lead to financial stains and will require meticulous planning and budgeting.
Here are some of the key features of bridge loan financing offered by banks:
| Maximum Amount | The amount is limited by the net proceeds and CPF balances from the approved sale of your existing home. |
| Maximum Tenure | Within 6 months |
| Interest Rate | Depends on the bank; typically, interest rates range from 5% p.a. to 6% p.a. |
If for some reason you can’t take out a bridge loan with your bank, you can consider the bridging loan plans offered by licensed money lenders. Here are some of the features of a money lender bridge loan as listed on the Ministry of Law Singapore website.
| Maximum Amount | Up to 6x your monthly income |
| Maximum Tenure | Up to a month or until the property’s completion date |
| Interest Rate | 1% to 4% |
Pros of a Bridge Loan
- Quick access to funds. Since bridge loans are short-term loans, they are processed faster than traditional loans.
- Homeowners and investors will not miss out on opportunities even before selling their existing property.
- Flexible repayment options, depending on the bank or licensed money lender.
- You can borrow a large lump sum of money for the down payment on your home. The funds can also be used for any fees necessary to purchase the property.
- A quick, short-term solution. Bridge loans get borrowers through immediate financial gaps without long-term commitment.
Cons of a Bridge Loan
- Given their short-term nature and convenience, bridge loans typically come with higher interest rates than conventional mortgages.
- If a property doesn’t sell as quickly as anticipated, you may end up paying two mortgages, along with the lump sum interest payments on the bridge loan.
- Higher potential for default if the old property doesn’t sell in time or the sale falls through.
- Most bridge loans are secured, meaning they require collateral. If the loan isn’t repaid, the lender may have the right to claim the property.
When To Consider a Bridge Loan in Singapore
A bridge loan is a valuable short-term financial solution during specific situations in the property transaction process. Here are instances when you might consider a bridge loan in Singapore:
- Upgrading to a New Home: If you’re buying a new property in Singapore and haven’t yet completed the sale of your current property, a bridge loan can help pay for the down payment of the new one.
- Sudden Relocation Needs: If you’ve had an unforeseen event, like a job transfer or a family emergency, that requires you to relocate quickly and purchase a new home, a bridge loan can provide the needed funds without waiting for your current property to sell.
- Short Timeline to Complete a Sale: If the timeline to complete the sale of your existing property is tight, a bridge loan can provide the necessary funds to ensure you don’t miss out on a potential property opportunity.
- Competing Against Other Homebuyers: A bridge loan can ensure you have the funds required to make an offer on a coveted property without delays.
- Flipping Properties: If you’re a real estate investor looking to flip properties, a bridge loan can provide the short-term funds necessary to acquire and possibly renovate a property before its resale.
Top 4 Bridging Loans in Singapore
| Financial Institution | Type of Property | Maximum Loan Amount | Interest Rate | Tenure |
| DBS Bridging Loan | All property types | Up to 75% LTV | Prime Rate4.25% p.a. | Up to 6 months |
| Standard Chartered’s HDB Bridging Loan | HDB | Up to 75% LTV | 3 months SIBOR plus 2% annual interest | Up to 6 months |
| UOB HDB Home Loan | HDB | Determined by the net proceeds from the sale of the property. | 4% to 6% | Up to 6 months |
| Licensed Moneylenders | Can be used to finance all property types | Up to six months of your monthly salary | 1% to 4% monthly | One month or until the property’s completion |
Bridge Loan Alternatives
- Home Equity Line of Credit (HELOC): A revolving line of credit that allows homeowners to borrow against the equity in their current property. It offers flexibility as you can draw and repay funds as needed.
- Home Equity Loan: A one-time loan that offers a fixed amount of money based on the equity of your home, usually with fixed interest rates. It’s essentially a second mortgage on your current property. Unlike HELOC where homeowners draw against a line of credit on an as-needed basis, this type of loan is a lump sum payment.
- Personal Loan: An unsecured loan so no need for collateral. Personal loans offer fixed interest rates and are not tied to property equity, but might have higher interest rates compared to secured loans.
Conclusion
Bridge loans are a strategic financial solution for taking on the financial challenges faced by homeowners and investors. This type of loan can be used for different situations, from property upgrades to sudden relocations, providing quick access to funds. However, as with all financial assistance, it’s vital to weigh the benefits against the inherent risks.
Key Takeaways:
- Bridge loans provide quick financial solutions in transitional property situations.
- While they offer flexibility and competitive advantages, they come with higher interest rates and potential risks.
- Take your time comparing the different bridge financing plans offered by banks and financial institutions. You may also look into licensed money lenders since they offer quick approvals and flexible repayment terms.
