There comes a time when people are in the midst of property transition, and they need money to allow the process to go smoothly. This is when people opt for bridging loans. A bridging loan is a loan type provided for a short duration. It can be taken from the bank to allow for a smooth transition from the old property to the new property. Suppose you wish to buy a new property and sell your old one. You have already signed the purchase agreement for the new property. Therefore, you must go ahead with remitting the down payment for the new property. However, what would you do if you did not have the required amount of cash at hand? What if the funds from your old property sale have not come through yet? This is where you opt to secure a bridging loan from your bank.
Some Basic Terminology Regarding Bridging Loan Singapore
Maximum Amount: The maximum amount is limited depending on your CPF balances and net proceeds from your old property sale.
Maximum Tenure: The bridging loan must be settled within six months
Interest Rate: The interest rate will primarily depend on the bank you have approached. Generally, the interest rate ranges from 5% to 6% per annum.
How to use bridging loans to reduce the LTV ratio?
Let’s Use The Following Condition To Understand The Use Of A Bridging Loan.
- The price of your new property: $1,000,000
- Maximum amount of loan available: 7 $50,000 [75% LTV]
- Down payment: $200,000
- Net proceeds from the old property: $500,000.
According to the current scenario, the $500,000 that you are supposed to receive from your old property has not come into your possession yet. However, you have to pay the new property’s seller. You will opt to take a bridging loan of $200,000 to cover up the noncash down payment in such a condition. To this, you will add $50,000 of your own money, and the loan that you have taken from the bank of $750,000 will cover up the rest. However, after this, you will have $300,000 left after repayment of the bridging loan. What can you do with this $300,000?
For The Remaining $300,000, You Can Go With One Of The Two Options:
- Take the $750,000 loan from the bank in full. Wait till the penalty period of the payment gets over. After this, pay back $300,000 as loan repayment.
- Alternatively, you can increase the bridging loan quantum 2$500,000. In this case, you will have to take a home loan with 45% LTV. This will amount to $450,000. Once the money from the sale of your old property reaches you, you can pay back the bridging loan. In this case, the bridging loan will be bridging your home loan as well as the down payment.
If you consider taking a bridging loan, you should keep in mind that you will have to pay it back within six months. Therefore, make the decision wisely.