Buying Again - 23 Aug, 2013

The Benefits and Disadvantages of a Bridging Finance Loan

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A bridging finance loan allows you to buy a new property before you have sold your existing property. Basically, this type of loan is a temporary mortgage that spans over 12 months. However, in some cases, you may be able to take out bridging finance for longer. Of course, this depends entirely on your lender and on their lending terms.

Different Types of Bridging Finance 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.

Advantages of a Bridging Finance Loan

  • You can buy a new property before you sell your existing property.
  • This type of loan is temporary.
  • You avoid losing the property you want to buy due to ‘subject to sale’ clauses in your contract and lengthy waits.
  • You avoid having to move into rental accommodation while you wait to find a new home after the sale of your existing home.
  • You can keep your monthly costs down with deferred payments.

Disadvantages of a Bridging Finance Loan

  • You’ll need to have enough equity in your existing property to cover the purchase of your additional property.
  • Your interest payments will accumulate until you sell your existing property.
  • You may be forced to sell your existing property at a lower price so that you can reduce your debt faster and live more affordably.
  • You will be charged interest on the full amount of your new loan.
  • A bridging loan is a short-term solution, not long-term.
  • The interest rate is higher, as this type of finance carries more risk.
  • It can be difficult to find bridging finance due to the risk associated with this loan type.
  • The paperwork is greater.
  • This type of loan is less attractive to lenders because it is short-term and they make less money out of the transaction than long-term loans.
  • Making no interest payments on the ‘peak debt’ can be costly as the interest incurred is added to your principal over the term of your loan. This means that your principal grows, instead of being reduced, as the interest is added to it, which, in turn, increases the amount of interest that needs to be paid each month.

Need bridging finance, but don’t know who to ask? Contact eChoice TODAY and find out how we can assist you.

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