Bridging loans are ideal for home owners seeking to upgrade (or even downsize) to a new residence. A bridging loan may be the perfect solution if you’ve found the ideal home you’re after but haven’t sold your current property (or even put it on the market).
They’re also available when building allowing you to stay in your current property whilst your new home is being built.
When taking out a bridging loan the lender takes security (registers a mortgage) over both your current property and the property being purchased. The total amount borrowed includes the existing debt against the property, purchase price of the new property as well as enough to cover purchasing costs (i.e. stamp duty).
Depending on the lender you may either have:
When the current property is sold the funds are used to pay down the loan to the previously agreed upon end debt.
Assume you have a $200,000 loan against a property valued at $450,000. You’d like to purchase a new property to live in which will cost $500,000. You’ve also estimated you’ll require an additional $25,000 to cover stamp duty and other costs.
Your bridging loan will be for $200,000 existing debt + $500,000 purchase price + $25,000 closing costs = $725,000 (known as the peak debt). Capitalised interest may also be applied on top (see below for more information on this).
Once the property is sold the proceeds are used to pay down the peak debt. Assuming $437,500 is net from the sale (allowing for legal & agents fees) the end debt will be $725,000 – $437,500 = $287,500 (if there is no interest capitalisation). Repayments will now be based on this amount.
An experienced mortgage broker will be find out your requirements and match them to a loan product that best meets your needs. This may not always be the loan with the lowest interest rate as some features may be more important to you than saving a few dollars each repayment.
Different lenders have different requirements as to what sort of repayments need to be made before your current property is sold (this may be dependent on the amount of equity in the property).
Some lenders only require Interest Only repayments on both existing and new debt until property is sold. Other lenders may allow you to capitalise (add on to the loan amount) the interest payable on the current property. The capitalised interest component will be paid off once the property is sold.
Some lenders charge a higher rate of interest to the borrower for bridging loans due to their increased risk. There may also be additional fees involved to switch lenders if your current lender does not have a suitable bridging loan product available.
Some lenders require you to show the ability to be able to make repayments on the peak debt. Others will only require you to show that you have the ability to repay the end debt.
Unless you are a high income earner it may be difficult to qualify for a bridging loan at a lender that requires you to show the ability to make repayments on the peak debt.
Very few lenders offer a bridging loan where there is no end debt (i.e. once the existing property is sold the total bridging loan will be paid off). This is most appropriate for buyers who own their current home outright and seeking to downsize to a smaller property.
Some lenders will expect you to sell the property within 6 months of settling the bridging loan. Others will give you 12 months to complete the sale after which they may attempt to force a sale or require you to be making repayments on the peak debt. For this reason it can be risky to look at bridging finance when the property market is trending down, or moving slowly.
The key requirements for a bridging loan are:
If you’re considering buying your next house we’d be happy to assist with the finance process. To find out the options available to you please get in touch with us about our obligation free mortgage broker service.