If you want to purchase a property but your current one has not sold yet, a bridging loan may be able to help you secure your new home before you sell your current one.
The loan covers any existing home loan and the new loan plus costs such as stamp duty. Repayments during the bridging period are generally interest only.
Once you sell your existing property, the sale proceeds reduce your overall loan balance and the loan switches to principal and interest repayments.
But is a bridging loan that simple?
To start off, bridging finance will not be for everyone, so speaking to an experienced mortgage broker is important. When looking into bridging finance, be cautious as you do not want to get stuck with a large loan and a property that won’t sell – it’s a nightmare!
The repayments during the peak debt period can also be high, so it is best to speak with your mortgage broker so that you know exactly what your repayments will be both before and after bridging.
Make sure you have received a property appraisal from a reputable real estate agent so that you are aware what the current value of your house is (so there are no nasty surprises down the track).
What are some of the benefits?
Let's start with the most obvious - it allows you to purchase your property of choice without having sold your current property. This would be very hard to achieve without the help of a bridging loan.
It can also help take away the stress of exiting your current home on the same day as moving into your new home, which gives you time to settle into the new house and then concentrate on getting your existing house ready for the market.
Buyers may have a bit more negotiating power when purchasing a new property, as it will be ‘subject to finance’, not ‘subject to the sale’ of your current property.
So, let's look at how a bridging loan scenario would work.
John and Jane have a home loan of $100K and a property worth $600,000 that they haven’t sold yet.
The couple have found a property that they wish to buy for $850,000, which has stamp duty and other costs of approximately $40,000.
This means that John and Jane wish to borrow $990,000, which will be secured by property worth $1,450,000. As a result, they are borrowing 68% of the value of their property.
During the bridging period, to limit the impact on their cashflow, the couple will make interest only repayments on the $990,000.
It is anticipated that after selling their home that they will have $582,000 to reduce their loan by.
This means that their end loan will be $408,000.
From lender point of view, as the couple are borrowing 68% of the value of the property and they can service an end loan of $408,000, as long as all the other lending criteria is met the bank will be happy to provide finance.
Does bridging finance differ from lender to lender?
I and it’s something that a good mortgage broker should go through with a client.
A few things vary from lender to lender. For instance, not all lenders provide bridging finance. Of the ones that do, only some will allow you to borrow up to as high as 90% of the value of the property. Some will also allow you to add the interest to the loan during the peak loan period so make sure you are armed with all the information before you jump in and sign on the dotted line.
The information contained herein is for informational purposes only and should not be solely relied upon as financial advice. Please contact Peard Finance for an individual assessment of your finances today.