Using a Bridging Loan for a successful property upgrade

For many Singaporeans, their property buying journey typically starts from buying a HDB flat as their first home, before hoping to upgrade to either a bigger HDB flat, an Executive Condominium or a private property.

Being able to afford your first home is exciting, but going on to buying a second home or upgrade from your current one can be even better. After all, living in your dream home is what some people slog through their lives for.

Say you felt that it’s a good time to buy now since the property market is still soft. You schedule a few viewings casually… and finally, you found the home of your dreams! What do you do now? Do you put down the deposit first, or do you try to sell your existing home first?

You see, buying a property is a huge financial commitment. Chances are you haven’t even finished paying down the mortgage of your current home. And now, if you are to put down the down payment for your dream unit, how are you going to finance the amount without any sales proceeds? Here’s where a bridging loan can be very helpful.

What’s a bridging loan?

The basic function of a bridging loan is help facilitate the down payment of a property purchase without having to wait for the sales proceeds from your current home. These loans are short-term loans designed to tide you over until you receive the proceeds from the sale of your old home. It is not meant to stretch beyond this period.

A bridging loan usually allows you to borrow up to 15% of the purchase price of your new apartment, and comes with a tenor of up to 6 months. Interest rates are around 5%-6% p.a and you can even choose to service only the interest during the tenor and repay the principal once you receive the sales proceeds.

Many banks that provide mortgage loans offer bridging loans as well and you can apply for one by submitting your Option to Purchase document. You cannot take up both loans from different banks because the property is securitized to one bank only.

How a Bridging Loan can help you

Let us take a look at a scenario where a bridging loan is put to good use.

You currently own a 4-room HDB valued at $500,000 and wants to sell it. You have your eyes on a 2-bedroom condominium unit going for 1.2 million. The priority is to get the condominium you want before it is sold to someone else. Thus, your priorities are these:

to put the deposit for the condominium ASAP
to sell of your HDB within 6 months to avoid paying the Additional Buyer’s Stamp Duty (ABSD)
to have sufficient cash for the down payment

Before you put down the 1% deposit for the option to purchase, you’d need to ensure that you’ve got your home loan ready. Because you currently still own a HDB, you’d need to work with an experienced mortgage broker to help you to get your loan approval such that you get an 80% loan-to-value. Your conveyancing lawyer will assist you on the ABSD remission.

Upon placing the deposit, you have about 3 weeks to exercise the option. During this time, you should start the HDB selling process if you haven’t. Your HDB flat’s option must be exercised before your Condominium’s exercise date to qualify for non-payment of ABSD as it is based on the exercise date and not the option-to-purchase date. If you think that having 3 weeks to sell your HDB flat is short, it is! Thus, it is important to work out a timeline with your mortgage broker so that everything goes smoothly and avoid any expensive costs in the process.

Following this, you will need to be able to pay the 5% down payment in cash and the stamp duty.

Stamp duty is computed at 3% of purchase price or valuation whichever is higher, less $5400.

For a $1.2 million unit, this will come up to $60,000 down payment and $30,600 for the stamp duty. Now, say you have sufficient savings for the stamp duty, but not the down payment of $60,000 cash. The remaining $180,000 down payment is also expected in few weeks’ time. You have determined that you need to borrow $240,000 for the short term.

This is when a bridging loan can be used to lend you money to pay for the $240,000 that you have not received from the sales proceeds of the HDB flat. Although this amount is more than the usual 15% of the purchase price, your mortgage broker may be able to help you negotiate with the bank for a higher loan-to-value.

In Summary,

Stage	Timeframe	Payment
Start to sell existing HDB and view condominiums concurrently
Put down 1% booking fee to secure condominium Seek to exercise HDB option concurrently	Day 1	$12,000
Look for a bridging loan and mortgage loan	Within 1 to 2 weeks	–
Exercise OTP and sign sales & purchase agreement, put down remaining 4% down payment in cash	within 3 weeks from Day 1	$48,000
Pay buyer stamp duties	Within 2 weeks from exercising option	$30,600
Completion of sales & purchase, pay 15% down payment with cash/CPF	Within 8 – 10 weeks from exercising option	$180,000

Thus, if you are someone looking to upgrade from your current apartment and lacks the upfront cash to pay down the down payment, you’ve got an option now! Let us know and our experienced mortgage brokers will be able to help guide you towards a smooth process of getting your home financing in order.