Bridging finance - Buy or sell first?
Need money or have yet to sell your house to buy your dream home? Bridging loans help bridge the gap between buying now and selling later quickly and easily.
So if that’s where you find yourself, check out how this innovative loan could make it all happen!
What is a bridging loan?
A bridging loan or bridging finance is a short-term financial solution that provides a bridge of financing over an existing gap in the capital. These loans are mainly used for property transactions and allow borrowers to access the funds they need quickly and easily.
Bridging loans can be secured against residential or commercial properties and are often used to purchase a new property before selling the existing one.
As the loan is short-term, it usually has a higher interest rate than a traditional mortgage. However, bridging loans provide borrowers with much-needed flexibility and convenience regarding property transactions.
Bridging finance calculation example
Say the amount you still owe on your current home loan is $400,000, and the amount you need for the new home is $1,000,000. You can borrow up to $1.4 million, which will be your Peak Debt.
You now owe $1.4 million on a short-term loan and must pay interest while you wait to sell your current property.
If you choose to capitalise on the interest that builds up on the Peak Debt, the debt will keep growing until you either start making payments or sell your current home.
Let’s say you’ve been paying the interest, and your Peak Debt has stayed the same at $1,400,000.
If the net proceeds from selling the existing property are $800,000 and you put the whole amount toward the Peak Debt, your End Debt will be $600,000 ($1,400,000 minus $800,000).
You can start your regular payments for a standard mortgage product.
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How does bridging finance work?
The amount of bridging finance available to you is directly proportional to the amount of equity you have in your current property.
If you haven’t sold after 9 months, interest on the new financing will be computed and capitalised for an additional 3 months, provided you meet the standard lending requirements.
You keep paying payments following the original loan agreement until the property is sold.
A bridging loan can help if you can’t afford it or don’t want to make payments on two home loans while you’re waiting to close on your new home and sell your old one.
It could also be a good choice if you need more money to pay for two long-term mortgages.
This implies that your repayment schedule will remain the same even though it may look like you have two homes and two loans.
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How much can I borrow with bridging finance?
The amount you can borrow with bridging finance depends on various factors, such as property value and its condition.
With a bridging loan, you can borrow up to 100% of your new property’s value. But in general, lenders will advance between 60-75% of the LVR.
Is bridging finance expensive?
Due to the higher risk associated with bridging loans, lenders will often charge a premium for them.
The cost of a loan depends on factors such as the size and complexity of the transaction, the estimated time it will take to complete it, and the security offered by the borrower.
As these types of loans are often used when there is a pressing need for finance, lenders usually charge higher fees and interest rates to protect themselves.
Bridging loans gives borrowers the flexibility and convenience they need to access funds for property transactions quickly. However, due to their higher risk profile, these loans tend to be more expensive than traditional mortgage loans.
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