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.
Key Takeaways
- Bridging loans are a short-term financing options for purchasing or building a new property before selling your existing property.
- They may help alleviate pressure to sell your current home quickly and avoid having to rent during the transition period, which can be inconvenient with the need to having to move twice.
- Understanding the mechanics, benefits, and risks of bridging loans is important before deciding if this is the right solution for you.
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:
- Renting: Renting out your current property to cover the mortgage costs while purchasing a new one.
- Downsizing: Depending on your situation, selling your existing property and moving to a more affordable new house, reducing your mortgage burden.
- 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.
Frequently Asked Questions
What are some alternatives to bridging loans?
There are a few alternatives to bridging loans you can consider when facing the financial gap between buying a new property and selling your current one.
Depending on your borrowing capacity and equity situation, you may have the option to take out home equity loan or cash out which may provide you with the necessary funds for your purchase.
Additionally, you could consider selling your current property before buying a new one, to avoid the additional expense of a bridging loan. Each alternative has its pros and cons, so it is important to carefully assess your personal financial situation and consult with a professional mortgage broker to help with your decision making.
Can I use a bridging loan for construction purposes?
Yes, bridging loans can be used for construction purposes. A bridging loan may be suitable if you plan to build a new home and would like to cover the costs during the construction process. Keep in mind that the cost of a bridging loan can be higher than other types of financing, so it is essential that you weigh your options and consider which type of loan best meets your needs.
How much deposit or equity is required for a bridging loan?
The deposit or equity required for a bridging loan varies depending on your specific circumstances, the value of your current property, and the purchase price of the new one.
Lenders generally require you to have a specific amount of equity in your existing property, often expressed as a percentage of the property value, to be eligible for a bridging loan. In most cases, you can expect to need a minimum of 20% equity in your current home to apply for a bridging loan.
Before making any decisions, it's advisable to talk to us since we have expertise in bridging loans. This will allow us to gain insight into your unique circumstances and determine the equity or deposit requirements.
How We Help Business Owners and other People Get A Better Briding Loan
Over the past 13 years we’ve helped hundreds of self-employed business owners and other people get better finance.
The Right Loan For Your Situation
Unlike other banks and brokers that most commonly cater for wage earners (not business owners), and are restricted to selling their own or brand-approved lending products (whether they are right for you or not), we specialise in working with business owners and have access to hundreds of loan options from dozens of lenders to ensure you get the right loan for your situation.
We Help You Structure Your Loan
While other banks and brokers merely find you a loan, we look at your whole financial situation and help you structure your loans in order to set you up for the future.
We Even Do The Paperwork
Once we find the right home loan, we pre-fill all the forms to save you time and maximise your approval success. And we review everything each year to ensure you’ve always got the right home loan.
Testimonials
Other Self-Employed Business Owners and Individuals We’ve Helped
If you’ve ever tried to get a loan from your bank, you’ll know how hard (and often disappointing) it can be. But it doesn’t have to be that way. Take a look at what some of our clients say about how we helped them get finance for their home, investments, and business:
The team at Pro Options has more than 48 years of combined experience helping self-employed business owners and other indiviuals get fast approval for better finance. Here’s what some of them say about their results and experience with our team:
A Huge Thank You To Alex From Our Mortgage Options!!
A huge thank-you to Alex from Our Mortgage Options!! I came across Alex about 18 months ago when my partner and I were trying to get into the housing market as first home buyers. Thank god we found Alex and had him on board to help us with our journey. He guided us all the way from getting our pre approval to buy our land and house making everything so easy and stress free. He found us a great loan and bank, explaining everything we needed to know in plain english. He managed everything related to our bank including progress payments and inspections with his communications always prompt causing no delays. Thank-you Alex for helping us to get our first home:)
I have been working with Alex for 12 years and he has been wonderful to deal with, his knowledge and client focus have saved me thousands of dollars. Highly recommended!
Alex and his team are top notch brokers and always goes beyond the call of duty to help clients, I would recommend his service to anyone needing finance.
My Investment Refinance Journey Paid Huge Dividends!!
“As an experienced investor who has required finance for property purchases whether they be for land, units, houses or for construction both in NSW or interstate, I’m always after a better deal. Ultimately the better the deal, the more dollars I can drive back into further investments to achieve my financial freedom dreams and fund my lifestyle that includes a comfortable family home, private school fees for my children, numerous overseas trips, and stepping ever closer to leaving the rat race behind. Recently in this strange Covid-19 world, Alex at Our Mortgage Options managed to refinance my exisiting mortgages and secure me additional construction loan finance that has now paid off handsomely. I’m basically at minimum now $500 a month (or $6000 a year) better off with reduced interest rate payments meaning that the next project after this new property is built, is not that far away. The refinance journey due to financial institution compliance can sometimes be excruciatingly long and frustrating but with Alex in your corner, well worth it!!”
Alex was extremely helpful throughout our 1st home purchase. He made the process smooth and hassle free. He is well versed in his field and we would recommend his professionalism to anyone who is needing the guidance that he offered in serving us.
Great mortgage brokers. These guys will give you great advice in terms of the best home loan product. Speak to these guys before going to your bank. You won't regret it.
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ACQUAINTANCE:
We take time to understand your needs and financial situation so we can source and structure the right loan to save you interest & fees while protecting your assets
ANALYSIS:
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