Bridging finance is a short-term loan that allows you to purchase a new property before you sell your existing one, essentially 'bridging the gap' between two home loans.
The lender you choose takes security over both properties and lends against these properties until the sale and purchase process on both is completed. During a bridging loan period, your home loan will generally be charged as an interest-only loan. Many lenders offer interest rates comparable to the standard variable rate, or only slightly above.
Bridging home loans are a good way to buy a new property before the sale of your existing home. They are commonly used to finance the purchase of a new property while your current property is being sold, but also provide finance to build a new home while you live in your current home.
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How does a bridging loan work?
Some lenders may allow you to capitalise the interest on a bridging loan, relieving you of the necessity of making loan repayments during the bridging period.
If you choose to capitalise the interest you will most likely have a slightly higher new home loan to cover the capitalised interest.
With some lenders you can have up to six months to sell your home if you are purchasing an established home and up to 12 months if you are building.
When you sell your first property, the proceeds of the sale are applied to the bridging loan, and any remainder becomes the end debt or new home loan. At this stage your home loan will usually revert to the lender’s standard variable interest rate or the interest rate you have negotiated.
Factors that will influence your decision.
While in simple terms, funds from a bridging loan will bridge the finance gaps noted above, the right loan products for you will depend upon a number of factors.
- How long are the funds required for?
- Do you have an unconditional contract on the property you are selling? Or are you yet to sell?
- Are you building your new home or buying an established property?
- Are the properties for investment or primary residence?
- What is your ability to service or meet the repayments on your current loan and the bridging loan?
Your answers to these questions will define both the right bridging loan type for you and the amount you will be able to borrow. As with all loans, you need to be aware of the risks. We can talk through the pros and cons together.
Portability allows you to transfer your current loan from your old property to your new one, thereby avoiding many of the setup and ongoing costs associated with a new loan.
A lot of people don't stay in the same home for the whole 25 or 30 years they've got their home loan for. Many home loans these days have a loan portability feature in part or total, but it's not offered by all lenders so it's important to check with your mortgage adviser. Because it's the same loan, you'll not have to pay exit and entry fees.
Capitalised interest loans.
With a capitalised interest bridging loan, no repayments are required on the new loan while you are selling your existing home.
Instead, a new loan is established to purchase the new home and pay out the loan against your existing home.
You'll continue making repayments on your existing loan, and in the meantime, interest is charged and accrues to your new home loan account as normal. You do not need to make any repayments on that loan for six months, or until you sell your existing home, whichever occurs first.
In most cases, you can borrow up to 100 per cent of the value of your new home plus any associated fees and charges. Typically your combined loans cannot exceed 80 per cent or 85 per cent of the combined value of both your new and existing properties, after taking into account the amount of interest that will be charged on the new loan during the changeover period.
Not sure how a bridging loan works? Here's a practical example.
A couple owned their home unencumbered and wanted to buy and relocate prior to the sale of this property. They believed that their property would present better for sale without their outdated furniture and also, they did not want to suffer the daily hassle of keeping the house in tip-top order for prospective buyers. As vendors, the couple were also reluctant to allow a longer than normal settlement time frame.
Their current property is valued at $450,000 and their new home is $568,000. They are on limited incomes and so could not afford a loan of $500,000. They elected to buy the new property, move in and use a capitalised interest loan. This couple sold their existing home for $612,000 within 4 weeks, but it’s important to note that there was still the risk that the current home might not have sold within the specified six months.