- 11 Jul, 2017

Buying First? You May Need Bridging Finance

Selling your home and buying another can be tricky. Sometimes you will need to buy before selling. This situation can leave you without capital for your next home. But, the good news is bridging finance is available to cover the shortfall.

What’s Bridging Finance?

A bridging loan is a mortgage that covers the cost of buying a new property while your old home sells. So, just how does this finance work?

  • Loan size calculation – Lenders estimate the size of your loan based on the value of your new and existing mortgage. They then deduct the estimated sale price of your home from this value.
  • You’ll have an ongoing balance – The value that the bank calculates is an ‘ongoing balance’. Therefore, this amount represents the principal of your bridging loan.
  • Both properties act as security – Your new and existing home secure your bridging loan. As a result, you’ll have one loan covering both properties.
  • Mixed rates are typical – Lenders request you make principal and interest payments on your existing loan. Although, your bridging loan amount attracts an interest-only payment.

When Do I Need Bridging Finance?

Bridging finance covers the financial gap between properties when buying. So, while you ideally want to sell before buying, sometimes this doesn’t occur. The times when bridging finance is ideal include:

  • Selling a suburban or rural property – Homes situated in suburban or rural locations suit bridging finance. Why? Well, they are typically slower to sell.
  • Making a quick purchase – When you find that ideal property, you don’t want someone else to snap it up. So, it’s best to make an offer as soon as possible.
  • Building a new home – Being able to stay in your existing home while building can save you money. Firstly, you won’t have to rent. Secondly, you’ll only have to move once.

What are the Pros and Cons?

Of course, it’s important for you to weigh up the advantages and disadvantages of bridging finance, before jumping in. Carrying out your due diligence ensures you make the right decision.

Pros

  • Buying can occur straight away – There’s nothing more frustrating than waiting for loan approval. Also, you don’t have to wait until your home sells to start looking.
  • Fetching the price you want – Having your finance sorted means you have greater negotiation power. Plus, you don’t have to feel obligated to accept a lower price on your existing home.
  • Rates are competitive – In the past bridging loans attracted a higher interest rate. However, rates are now similar to the current market variable rate.
  • Standard fees apply – In the past, application fees for this type of loan were higher. However, times have changed, and fees are usually no more than $600.
  • Unlimited principal and interest payments – There are no penalties attached to making extra payments on the loan. So, you can pay as much off as you like.

Cons

  • Interest compounds monthly – The interest on the loan accumulates on the original debt. But, it increases monthly. Therefore, the longer it takes to sell your existing property, the more interest you’ll pay.
  • You’ll need two property valuations – Having two properties means the bank with need two valuations. At $200 to $300 a pop, these are costly.
  • No redraw facility – As a featureless loan, bridging finance has no redraw facility. Consequently, you won’t be able to withdraw any extra repayments made.
  • Early termination fees – If you decide to refinance using another lender, then you may attract an early termination fee. These can be hefty, so do your research.

Do you want to find out more about bridging finance? Then contact eChoice, our brokers have access to 100’s of products, so we’ll help find you a competitive mortgage rate.


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