Bridging Loan
If you find yourself with two properties, in addition to two mortgages to pay, you need to look at your options. One option is checking if the seller will allow an extended settlement period, giving you more time to find a buyer for your current home, or, you could also look into bridging finance.
WHAT IS A BRIDGING LOAN?
A bridging loan, or bridging finance, is a short term loan that typically has a term of six to 12 months, which covers both the existing and new debt.
Do your homework on loan features, conditions and structures because they vary between lenders. For example, some lenders will request regular repayments for both the new and existing debt, which can create significant financial strain. Other lenders may add the new debt’s interest payments to the total loan balance for the next home but allow the borrower to hold payment until the first home sells.
It's also advisable to be realistic about the price you expect for the first property. You may need to lower your expectations in order to meet your bridging finance period and/or to sell sooner.
TYPES OF BRIDGING LOAN
There are two main types of bridging loan available:
- Closed Bridging Loan
- Open Bridging Loan
Closed Bridging Loan has been appropriately named to their function because in this case, the date for exiting the loan is pre-agreed upon before finalizing the date of repayment of the bridging finance. If you are a homebuyer who has already done an exchange on the sale of their existing property, then you can avail this loan.
If you have already found the property of your dreams, but do not have an exact date to exit the bridging finance since you did not put your existing home on the market, then you should go for an open bridging loan. The standard limit for this type of loan is 12 months. The bank would most likely negotiate an extension if needed as long as you pay the interest during the repayment period and the property has not collapsed.
LOAN BENEFITS
You can confidently search for a new home even though you have not made a settlement on your existing property. | |
You can choose between principal and interest, or interest-only repayments. | |
You can use the proceeds from the sale of your home to reduce the balance on your bridging loan following the settlement. | |
You can make unlimited lump sum payments, depending on the terms of your finance. | |
You can purchase a new property and not have to sell your existing property first. | |
If you are building a new property, you can still stay at your existing home until completion of construction. | |
A bridging loan term of six months means less pressure to sell quickly. | |
You get a flexible repayment plan to suit your individual needs. |