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What Is A Bridging Loan

Buying a home requires substantial financial commitment. To start with, one must have enough money to make the required down payment. In Singapore, most homebuyers must make a 10 percent cash down payment. Secondly, one must find a lender who is willing to put up the rest of the money. However, the process of buying a home can become more complex if a homeowner has to buy a new property before selling the old one. This is where bridging loans come in handy.

An Overview

A bridging loan is a form of short term financing that a homeowner can use to make a down payment on a new home. In most cases, people take out bridge loans because they have yet to sell their old homes. Moreover, they may not have the cash required to make the mandatory down payment. The validity period for such loans typically ranges anywhere from two weeks to about six months. In general, this type of loan precedes a long term financing agreement.

Fees and Interest Rates

Fees and interest rates for these loans vary from one lender to another. Nevertheless, the longer the loan period, the higher the interest rates and fees a borrower will pay. Take note that some bridging loan rates are significantly higher than the prime rate. For example, this type of loan may come with an interest rate that is one percent higher than the prime rate. To ensure you get the best interest rate possible, it is advisable to shop around, compare rates offered by different lenders, and then choose one that is affordable and suits your needs.

Pros

Firstly, it is relatively easy to get a bridging loan in Singapore. Secondly, lenders tend to have flexible repayment periods. For instance, six months should be enough to find a buyer for your old home and clear your bridge loan. Thirdly, foreigners who live in Singapore can access short term financing to buy new homes. However, foreigners should contact their lenders for more information (terms and conditions) on short term loans before they commit themselves.

Fourthly, you do not have to repay the principal amount during your loan’s repayment tenure. All you have to do is service the interest. You can repay the principal loan amount after you receive sale proceeds from your old home. Fifthly, this type of loan comes in handy if you really want to move elsewhere quickly. For example, you may want to relocate to another town to start a business or take up a new job.

Cons

Short term financing to purchase a new home can be quite expensive. This is because interest rates for such loans tend to be higher than rates for traditional mortgages. You may also attract a heavy penalty if you repay your loan early. For this reason, it is wise to go through your lender’s terms and conditions carefully before you sign on the dotted line.

Overall, the world of real estate financing can be quite confusing. This is especially true for people who require short term funding to purchase new homes. Professionals in the real estate industry refer to this type of financing as bridge loans. The good news is Singaporeans as well as foreigners can access these loans. In addition, loan recipients can repay the principal loan amounts after selling their old properties. Major disadvantages associated with these loans include high interest rates and fees. This may put off people who do not want to pick up more debt.