bridging loan:

bridging loans your essential guide

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bridging loan: essential guide for smart financing

Bridging loans serve as a short-term financing solution that usually have a term of between 6 to 12 months, they are intended to assist individuals in obtaining the necessary funds for acquiring or constructing a new property prior to completing the sale of their current property.

A bridging loan could be a suitable option for those who wish to avoid the pressure of having to sell their current home quickly before so they can purchase or build a new home, or the inconvenience of renting during the transition period.

It’s essential to understand the mechanics behind bridging loans, as well as their benefits and potential risks, before deciding if this is the right solution for your circumstances.

As the name suggests, a bridging loan “bridges” the gap between the purchase of a new property and the sale of an existing one.

Most people opt to sell their current property first and use the equity to buy a new home. However, there are situations when buying first before selling your existing property may be a more suitable choice, such as when you’ve found your dream property but haven’t yet sold your existing one.

With this scenario, a bridging loan could allow you to borrow up to 100% of the purchase price of the new property, plus any associated costs, such as stamp duty, making it a possible option for property owners who are in transition.

what is a bridging loan?

Allows You To Buy or build a new home before you sell your current home

As the name suggests, a bridging loan is a short-term financing solution designed to help you purchase or build a new property before selling your current one. This type of loan could come in handy when you find your dream home and wish to act quickly without waiting for your existing property to sell so you can free up the funds for a deposit on your next property.

Home Equity

Bridging loans utilize the equity in your current home to fund the purchase or construction of a new property, eliminating the need for a cash deposit.

Lenders offering bridging finance will typically lend a percentage of your current home’s value, usually up to 80% minus any existing debt, which can be used as a deposit for the new property. The bridging loan will cover the remaining balance.

Peak Debt

With a bridging loan, your peak debt is the sum of your existing mortgage and the purchase price of the new property or land purchase plus construction costs. The peak debt represents the highest amount you will owe to the lender during the bridging period.

Loan Affordability Is Usually Worked Out On The End Debt

The affordability of a bridging loan is typically based on the end debt, not the peak debt. The final debt or end debt is the amount you will be responsible for after selling your current property and making a partial payment on the bridging loan.

Lenders typically determine your borrowing capacity based on the final debt amount. To ensure your ability to handle the remaining debt, they calculate what you’ll owe after selling your property and accounting for costs, fees, and charges.

Capitalizing Interest Repayments on existing loan

During the bridging period, you may be able to capitalize interest repayments on your existing loan, meaning that interest payments can be added to the total loan balance instead of paying them monthly, keep in mind that you will end up paying this from the sale proceeds of your current property.

This could help reduce your expenses while you focus on selling your current property and moving into your new home.

Selling your current home

While bridging loans provide flexibility in purchasing or building a new home, it’s crucial that you sell your current property within the specified bridging period. If you fail to do so, you may face higher interest rates or other penalties from the lender.

End Debt – Residual Loan After Selling Your Current Home

Once you sell your existing property, the proceeds from the sale are used to pay off a portion of the bridging loan, leading to your end debt. This is the remaining balance that needs to be repaid, which becomes your new mortgage for the new property.

By understanding how a bridging loan works and considering factors such as peak debt and end debt, you can confidently navigate the process and make informed decisions when transitioning between properties.

Benefits and Risks of Bridging Loans

Consideration of Pros and Cons

Bridging loans may provide flexibility and quick access to funds when you’re purchasing or building your dream home before selling your existing one.

These short-term loans could allow you to avoid the stress of matching up settlement dates and give you more time to sell your current property. However, it’s essential to weigh the pros and cons of opting for a bridging loan.

Pros:

Quick access to funds for purchasing or building a new house.
More time to sell your current property.
Temporary financing solution during property transition.
Potentially utilize property valuation for your current home.

Cons:

In some cases, higher interest rates compared to traditional home loans, this is often during the bridging period.
Additional financial stress if unable to sell your current property promptly.
May require a 20% deposit or equity or more.

Risks of Not Being Able to Sell Your Current Home

If you’re unable to sell your current property within the bridging loan term, you may face financial challenges and pressure.

In a scenario where your home doesn’t sell, your borrowing power might be significantly reduced. This might result in a higher Loan to Value Ratio (LVR) or necessitate loan refinancing for more attainable repayments. Assess your risk by consulting a mortgage broker or home loan expert before deciding on a bridging loan.

Exploring Alternatives

Other options you may wish to consider before you limit yourself to a bridging loan; there are various other financing options available, such as:

  1. Renting: Renting out your current property to cover the mortgage costs while purchasing a new one.
  2. Downsizing: Depending on your situation, selling your existing property and moving to a more affordable new house, reducing your mortgage burden.
  3. Refinancing: Working with a mortgage broker to refinance your current home loan, potentially unlocking more borrowing power.

It’s always wise to seek advice from home loan experts or a mortgage broker before making a decision.

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