Do you hope to buy a nice but pricey new place as you await the sale of your existing home? If this is where you are, you might want to look at bridging loans. These can assist you in “bridging” the gap in financing between securing the new house and selling your current one.
Bridging Loan Basics
A bridging loan is a short-term loan or other funding option that a number of banks and moneylenders offer together with home loan services. It is treated as a secured loan by lenders. The good thing is that applications can be made even as you await the sale of your current home, should you desire to move quickly on an enticing new listing.
Private property as well as HDB flats may be purchased through the use of such bridge financing in Singapore. If you are currently short of money, this can be the temporary financing you need. However, bridging loans should not be relied on in place of home loans, as their tenures are not that long. Also, banks and moneylenders will not offer higher quantum for such loans.
How A Bridging Loan Works
On how a bridging loan can work for you, here is an example for a simple home purchase.
Let’s say you have a four-bedroom HDB flat, estimated to be worth $500,000, which you now wish to sell. You are presently considering a two-bedroom condominium unit that’s selling for $1.2 million or so. Unfortunately, the unit will be on sale for only a short while and it‘s possible for a rival buyer to acquire it ahead of you.
Due to this situation, you must ensure the following:
- Put in a deposit immediately.
- Sell your current property before 6 months passes and the Additional Buyer’s Stamp Duty is charged to you
- Have enough funds to make the down payment for the property.
Before you put in a 1% deposit for the purchase, you must have a home loan prepared. As you would still need to dispose of your HDB flat, you should consult an expert mortgage broker who could assist you in securing offerings with the best loanable values. Your ABSD remission could be attended to by a conveyancing lawyer.
Once the deposit has been made, you would have up to 3 weeks to make sure that the purchase can be finalised as agreed. You should them move without delay to sell your old HDB flat, while confirming that you’re qualified for ABSD exemption. These things would all need to be done prior to the exercise date for your new purchase.
Given the time constraints in this example, it may not be that easy to get the flat sold, if no prospective buyers were around. To prepare well, you would speak with your mortgage broker to work out a suitable timeline, to avert any added fees and confirm that all would proceed smoothly.
After these steps, you would ready the funds needed to make the 5% down payment while ensuring that the stamp duty is paid. The amount of the stamp duty to be charged would normally be 3% of either the property’s purchase price or else its valuation, whichever is the higher, from which $5400 would be deducted.
Using the $1.2 million condominium unit as an example, you would be making a $60,000 down payment and be charged a $30,600 stamp duty fee. Were there only enough funds to pay the stamp duty but not the entire down payment, you would have to decide where to find more money. You would then face having to pay the additional $180,000 down payment within a few weeks. With all such costs adding up, you would have to come up with $240,000 in total to acquire the property.
A bridging loan can serve here, for you would use it to pay off the $240,000 that isn’t yet forthcoming from a sale of the old HDB flat. Even though the amount exceeds 15% of the unit’s price, you could find home financing deals with high loan-to-value through a mortgage broker.
The Difference Between Bridging Loans And Home Equity Loans
When applying for a bridging loan, you are likely to be waiting for the sale of your present home. You will be repaying it once the property has been sold and the proceeds are in hand.
With home equity loans, you need to put aside money for such before you can start listing the property. Home equity financing involves the fact that the funds you could borrow may exceed the worth of your existing home. You won’t be able to sell it so long as the loan remains active, but the funds may be used to meet a range of needs other than household-related expenses.
On the other hand, bridging loans are only meant to be relied on for short periods, as borrowers await the sale of their old homes before securing the new ones they desire. These are not to be applied to other purposes.
What Will Be Checked In Applications for Bridging Loans?
Moneylenders who offer bridge financing will refer to the normal loan requirements, to see if your status meets their borrowing criteria. Their experts will determine if you have steady earnings apart from the sale of property, which should enable you to repay the loan by the agreed deadline. They will also examine your other sources of earnings against the possibility of your old property remaining unsold, owing to unforeseen circumstances.
Things to Remember
Prior to applying for bridging loans, it is vital to check whether the moneylenders you have contacted are licensed, to ascertain if the loan rates they offer are officially approved. You also need to ensure that you can pay for such loans on schedule, should selling your home take more time than you anticipated.
For those planning to move after selling their old homes, bridging loans can help secure the funds needed for buying the new homes they’ve been dreaming about. Through a bridging loan, once you’ve sold off your current home, you could repay the amount fully with less stress and fewer issues afterwards.