- 20 Jul, 2018

Bridging Loan

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Selling your home and buying another can be tricky, especially when it comes to financing. Sometimes you’ll find the ideal property before selling your existing home, and this may reduce your buying funds. But, the good news is that a bridging loan is available to cover the shortfall. Let’s look at bridging finance in greater detail, so you know when to ask for this loan and how it could help you out of that tricky situation.


What’s a Bridging Loan?

A bridging loan is a mortgage that covers the cost of buying a new property while your old home sells. Typically, this form of finance is interest-only based, meaning that you’ll only have to pay the interest incurred monthly, rather than paying both the principal and interest. The principal payment occurs when you sell your existing property. So, just how does this finance work?

When you take out a bridging loan, you effectively have two mortgages, but they roll into one financing package. As such, both home loans incur interest, so it’s vital that you have enough funds to cover the monthly costs of servicing both loans. Some lenders may waive the repayment on the bridging loan interest until your existing property sells. However, this is not always the case. So, you need to know what you’ll have to pay and when.

Different Types of Bridging Loans

There are two types of bridging finance loans on offer. The first type of bridging finance is classified as ‘peak debt’ where your lender will want to have both properties as the security for the one loan. This will then cover the debt of both your existing and new property. In most cases, you will then have between 6 and 12 months to sell your existing property. This is called the ‘bridging period’ and your repayment terms will depend on your lender.

During the bridging period, you may be asked to make repayments on the loan. However, some lenders will wait until you sell your existing property, with the sale then paying off the peak debt.

The second type of bridging finance occurs when a loan is taken out only on the new property and your existing home loan is retained. Repayments are then required on both loans during the bridging period. When your existing home is then sold, the mortgage over this property is paid out and the remaining funds are then put into your new home loan so that you can reduce your debt.

Repayments over the bridging period are usually on an interest-only basis. Therefore, your principal payment is put on hold until the sale of your existing property is finalised.

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How Does a Lender Work Out Bridging Loan Finance?

A lender looks at the new and existing home values, your credit history and financial status to see if you meet their lending criteria. If you do, then you’ll be able to take out a bridging loan for 6-months on an existing property, and 12-months for a new home.

The main factors a lender focuses on when assessing your bridging loan eligibility are:

  • Loan size – Lenders estimate the size of your loan based on the value of your new and existing property. They then deduct the estimated sale price of your home from this value to come up with a figure for your loan, which covers both properties. For instance, John is buying a home for $500,000. His existing home loan is $150,000, and his existing home value is $450,000. Therefore, his bridging loan value is $200,000.
  • Your ongoing balance – The value that the bank calculates is an ongoing balance’. Therefore, this amount represents the principal of your bridging loan. This loan’s interest compounds monthly. Therefore, the longer it takes you to sell your existing property, the greater the interest you’ll pay.
  • 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, with the balance paid after the sale of your existing home.

When Do I Need a Bridging Loan?

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:

  • When selling a rural property – Homes situated in rural locations suit bridging finance as they are slower to sell.
  • Wanting to make 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.
  • Looking to build a new home – Being able to stay in your existing home while building could save you money. Firstly, you won’t have to rent. Secondly, you’ll only have to move once.
  • Avoiding settlement stress – A bridging loan enables you to avoid having to match-up settlement dates. Less settlement stress often increases your chances of being able to sell your existing home for the price you want.

What is my mortgage repayment?

$1,514
/month

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What are the Pros and Cons of a Bridging Loan?

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 that you make the right decision, so let’s look at these factors now.

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.
  • Getting 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 will 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 find you a competitive mortgage rate.

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