Bridging Loans: An Alternative Financing Option for Clients Affected by TDSRBy Satish Bakhda
As property prices in Singapore continue to rise, more and more clients are finding themselves affected by the Total Debt Servicing Ratio (TDSR) framework. This framework, introduced in 2013, sets a limit on the amount of debt a borrower can take on based on their income and other financial commitments. While the TDSR framework is designed to promote financial prudence, it has also made it harder for some clients to secure financing for their property purchases.
This is particularly true for clients who are asset-rich but liquidity-constrained. These clients may own valuable assets such as real estate or stocks, but may not have the sufficient cash flow to meet the TDSR requirements. For such clients, bridging loans can be a useful alternative financing option.
What is a Bridging Loan?
A bridging loan is a short-term financing option that is used to bridge the gap between the purchase of a new property and the sale of an existing property. It can also be used for other purposes such as repaying an expensive loan, buying a share of a company, or any other temporary financial need. Bridging loans are usually secured against the borrower's existing property and can be repaid once the sale of the property is completed or through other means.
How can a Bridging Loan help clients affected by TDSR?
Clients affected by TDSR may find it difficult to secure financing for a new property purchase as their debt servicing ratio may be too high. This is where a bridging loan can be useful. As a short-term financing option, bridging loans are not subject to the same TDSR requirements as traditional long-term mortgages. This means that clients can use a bridging loan to finance the purchase of a new property without having to worry about their debt servicing ratio.
Additionally, bridging loans can provide clients with a quick and flexible financing solution. Clients can typically obtain bridging loans within a short period of time and can use them to finance a wide range of temporary financial needs. This can be particularly useful for clients who need to move quickly to secure a financial opportunity.
What are the risks of using a Bridging Loan?
While bridging loans can be a useful alternative financing option, they do come with some risks. Bridging loans typically have higher interest rates than traditional mortgages and can be expensive to repay if they are not repaid quickly. Additionally, if the sale of the existing property or other means of repayment is delayed or falls through, clients may be left with a bridging loan that they cannot repay.
For clients and corporates who are asset-rich but liquidity-constrained, bridging loans can be a useful alternative financing option. Bridging loans can help clients to bridge the gap between their temporary financial needs without having to worry about the TDSR requirements. However, clients should be aware of the risks of using a bridging loan and should only use them if they are confident that they can repay them quickly or through other means.