Are you looking for a way to build a property portfolio or to move into your next home without the need to rent in between? Whether way, a bridging loan can be a solution for you.
What is a bridging loan?
A bridging loan, or bridging finance, is a short term loan that finances the purchase of a new property while you are selling your existing property. It can also provide you with finance to build your new home while you live in your current home.
Typically, a bridging loan is an interest-only payment home loan with a limited loan term. The extent of the bridging loan is calculated on the equity in your current property. During the bridging period, you have two loans; the bridging loan and your current home loan. A bridging loan is an additional home loan that you take out on top of your current home loan until your current home/property is sold your bridging loan can be closed. Both your current home loan and bridging loan are being charged interest.
There are some loan structures that only requires you to make repayments on your current home loan until settlement. This means that during the bridging period, the interest on the bridging loan gets added to your ongoing balance on your bridging loan. But you don’t have to make repayments on it until your existing property is sold. On the other hand, other loan structures require you to make payments on both loans from the time you open the new loan.
Once your current home is sold, the bridging loan will be converted into your chosen home loan for your new home.
Keep in mind that the interest is compounded monthly, which means the longer it takes to sell your current home, the more accumulated interest. You will also need to check the bridging period, which is usually six months for purchasing an existing property and 12 months for a new property, as lenders can charge a higher interest rate if the property won’t be sold within this time frame.
What bridging loans are available?
Usually, you are given the option to choose between closed bridging loans or open bridging loans.
Closed bridging loans
This is a loan based on a pre-agreed date of the sale of your existing property will be settled, mean you can pay out the remaining principal of the bridging loan. This type of bridging loan is suited to consumers who agreed on the sale terms of their property. Lenders tend to see them as less risky as the sale has been locked in.
Open bridging loans
An open bridging loan is where the sale of the property has not been settled, and the property may not yet be on the market. This type of bridging loan is used by homebuyers who found their ideal property but haven’t set an exit date to the bridging loan. Because of its uncertainty, these loans pose a greater risk to lenders. They will ask more questions and require proof that the property is on the market. You should consider preparing a backup plan in case the sale of your house doesn’t proceed as planned.
How can a bridging loan help me?
Selling your current property to move into your new house can be a stressful process. By taking our a bridging, you can spare yourself from stressing over the finance of your move. You can avoid the stress of trying to match up settlement dates. This can give you a better chance of selling your existing home loan at a reasonable price without time pressure.
Ideally, it would be possible to sell your current home and buy a new home on the same day– but there’s a cooling-off period. During this period, the buyer has to arrange finance to buy their new home before settlement day.
The reality is there’s an amount of uncertainty in the housing market and bridging loans allow people to buy a new home while waiting for their current home to be sold.
Usually, borrowers can also add the upfront costs of buying a home to a bridging loan, such as stamp duty, legal feesand inspection fees.
How does a bridging loan work?
Once you take out a bridging loan, the lender usually finances the purchase of the new property, as well as taking over the mortgage on your current home.
The total amount of finance borrowed is referred to as the ‘Peak Debt’. It is generally calculated by adding the value of your new home to the outstanding mortgage from your current home. By then subtracting the likely sale price of your existing home, you’ll be left with the ‘Ongoing Balance’ and this will be the overall balance of the new loan.
During the bridging period, interest will be compounded monthly on your ongoing balance at the standard variable rate.
Some lenders do not charge higher interest rates on bridging loans than on other types of home loans, but it’s important to compare your options.
There are a few requirements that wouldn’t apply to other types of home loans but applies to bridging loans. With many lenders, criteria apply such as:
- Maximum LVR requirements can apply, meaning you need a deposit of a certain amount in order to apply, e.g. a 25% deposit.
- The maximum loan term can apply to bridging loan, e.g. your current home needs to be sold in 6-12 months.
- Not usually allowed to use a redraw facility on the bridging loan during the bridging term.
- Not usually available for construction loans.
- Not usually available for company purchases or strata title purchases.
Pros and Cons of bridging loans
|Pros of bridging loans||Cons of bridging loans|
|● Convenient: You don’t have to wait for your current home to be sold. Bridging loans ensure that you can buy your property straight away.|
● Repayments: In the duration of your bridging period, you only make repayments on your current mortgage.
● Avoid renting: You can avoid the costs and hassle of renting a home between the sale of your existing home and settlement of your new home.
|● Valuation cost: Bridging finance may require two property valuations for the two properties (your current property, and new property). This means there will be two valuation fees.|
● Interest: Usually, interest is charged on a monthly basis so, the longer it takes to sell your property, the more your new loan will increase.
● Interest rates: If you don’t sell your existing home within the allocated bridging period, you can be charged a higher interest rate.
● Termination fees: If your current lender doesn’t offer, you’ll have to switch lenders. This may result in early exit fees from your current loan.