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Real Estate Financing 101: Bridge Loan and Term Loan



Despite the on-going COVID-19 pandemic, the Singapore real estate market is showing no sign of slowing down. For the whole of 2020, property developers sold 9,982 private residential units (excluding ECs), higher than the 9,912 units sold in the previous year, according to data from the URA.



You might be thinking this is a good time to enter the market to upgrade to a private property, but you do not have sufficient cash and CPF monies for the hefty 20% downpayment. There is a way where you can still purchase your next dream condominium and that is by taking a bridging loan.


Bridging Loan


A bridging loan is a short term loan of up to six months and it can be used to purchase all types of properties. It is most commonly used to finance the downpayment of a new property while your current property is being sold.


In Singapore, it takes an average of 3 months to sell a HDB flat and about 6 months to sell a condominium. So while waiting for the sale proceeds to come in, a bridging loan can be used for the downpayment and other expenses related to the new property transaction. The interest rate for a bridging loan is around 6% per annum, but this varies between banks. Some banks may charge a lower interest rate for the first few months and in some cases, you do not have to make any repayments for the first few months. Some banks even have the option for you to pay only the interest until your current property is sold and you can use the proceeds to pay off the loan. It is best to speak to different banks on their rates and payment arrangements to find the best bridging loan package for your financial situation.


Applying for a Bridging Loan


Anyone in the process of selling their property and buying another can apply for a bridging loan. You will need to produce an Option To Purchase (OTP), stating that you have the right to purchase the said property. Your CPF withdrawal statements and outstanding bank loan statements will also be needed to determine the proceeds that will be available. You must also have a good credit rating score to get approval.


Once the bridging loan is approved, the banks will be using your property as a collateral for your loan repayment. So be sure to repay the loan on time or risk losing your investment. There are also late payment fees if you are not timely in repaying the loan. In short, a bridging loan is used to tide you over until you receive the proceeds from the sale of your old home and is not meant to stretch beyond that period.


As an example, if you are buying a $2 million apartment, you will need a downpayment of $400,000, of which, $100,000 must be in cash. The remaining $300,000 can be in the form of cash and/or CPF monies. If you do not have enough cash or CPF, you can apply for a bridging loan to make up for the shortfall.


Term Loan


As the Singapore property market is one of the most resilient in the world and has climbed steadily over the years, most of us who bought properties way back would have seen huge capital gains.


Let’s say you are in need of cash to expand your business or increase your investments portfolio. You can consider taking a term loan or a home equity loan. A home equity loan is a loan for a fixed amount of money that is secured by your home. You repay the loan with equal monthly payments over a fixed term. The maximum loan tenure is capped at 35 years.


If your property is fully paid and the value has increased over when you first bought, you may get up to 80% of the current value. But if you are still servicing the home loan, you may borrow from the portion of your property that is already paid off. However, only owners of private properties are eligible for home equity loans. Owners of HDB flats are not allowed to use their flats as collaterals for term loans.


Term loans are an easy way to free up extra cash at a lower interest rate as compared to other forms of loans. Most lenders typically charge slightly above 1% interest. While the low interest rates might seem very attractive, there are several important factors to consider before you apply for a home equity loan.


Bear in mind that if you still have an outstanding home loan, you can only get the home equity loan from the same bank you have taken the home loan from. For a fully paid up property, you should be able to get between 70% to 80% of your property’s current market value but the Loan-to-Value (LTV) limits of 75% will apply. The Total Debt Servicing Ratio (TDSR) requirements do not apply if LTV remains below 50%. The TDSR threshold for property loans is set at a maximum of 60% of the borrower's monthly income. Also do take note that when repaying the loan, you are not allowed to use your CPF funds.



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