A bridging loan is an interim or short-term loan that is needed until a more permanent form of financing can be arranged or finalised. Money from the more permanent form of financing is used to pay back the bridging loan. To compensate for the higher risk and the shorter period of amortisation, bridging loans are usually more expensive and carry a higher interest rate and often-higher fees. Bridging loans are commonly used in the real estate business to quickly conclude a deal to purchase property or to retrieve property from the process of foreclosure. They are normally repaid when the property has been refinanced on a long-term basis or sold.
Let us assume that you have found your dream house and the cash you have one hand added to the sale proceeds of your current home are adequate to pay for your new house. However, the catch is that you will need to conclude the deal before your existing house has been sold. If you wait till the existing house has been sold, you may find that the new house is no longer on the market. There may also be a period of a few months when you are left without a roof over your head. The solution to your problem is to take a bridging loan and make a down payment on the house. In due course, when you have arranged a long-term mortgage, the proceeds of the mortgage can be used to pay down the bridging loan. In Singapore, bridging loans normally have a tenor of six months.
The long-term mortgage and the bridging loan can be finalised with the same lender because the process is more straightforward and there will be no legal complications. You can get an in principle approval for a mortgage so that, when you finalise the sale of your house, all of you need to do is to present the sale document and finalise your bridging loan. In many countries, you can borrow a higher amount against the value of the house if you offer a first charge mortgage. Typically, because of the risk factor, you will be able to borrow less on a second charge mortgage.
Typically, the terms of the normal Singapore bridging loan while you are in the process of selling your HDB flat or your private property will be as follows:
- You can borrow up to 15% of the purchase price or the fair market value (the lower of the two)
- The interest rate will be around 1% over the prime lending rate
- The maximum tenor of the loan will be six months
- During the tenor of the loan, you have the option to pay interest only with the principal being repaid from the sale proceeds of your property
The other situation in which bridging loans can be used in the real estate business is by property developers who are waiting planning or regulatory approvals. Because these approvals may never materialise, the loans are made at higher rates of interest to offset the higher risk and the source providing the capital is often a specialist lender. Once regulatory approvals materialise, funding will be available from a variety of traditional sources and this funding is used to repay the bridging loan.