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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.

Bridging Loan

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

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

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.

QUALIFYING REQUIREMENTS

In order to qualify for a bridging loan, you will be required to have sufficient equity in your homes. Not having sufficient equity is the reason why people find it difficult to sell their existing home. This means that the interest they end up paying on the bridging loan keeps building up considerably

HOW THE LOAN PROCESS WORKS


When you take out a bridging loan, the lender will take over the mortgage of your existing property while also financing the purchase of the new property. The amount of your commitment is determined by adding the value of your new home to your outstanding mortgage of the existing home, after which the approximate selling price of the existing home is subtracted. The balance is called your “on-going balance,” and depicts the original amount of your bridging loan.


The next step is to calculate the amount of money that needs to be borrowed. This total amount borrowed is called the “Peak Debt.” This will include the loan balance on your existing home, the contract purchase price of the new home, and any purchase costs such as stamp duty, legal fees, and lender’s fees.


The minimum repayments on the bridging loan will generally be calculated on an interest-only basis. In many cases, this interest may be capitalised until the existing home is sold and added to the "Peak Debt.


The "Peak Debt" is reduced by using the net proceeds of the sale, which is obtained by subtracting any sale costs such as selling agent’s fees from the sale price, after the existing property is sold. The remaining arrears plus any capitalised interest becomes the “End Debt”. The "End Debt" is paid as a regular mortgage product.


Your bridging loan is APPROVED and you are good to go!


 When you take out a bridging loan, the lender will take over the mortgage of your existing property while also financing the purchase of the new property. The amount of your commitment is determined by adding the value of your new home to your outstanding mortgage of the existing home, after which the approximate selling price of the existing home is subtracted. The balance is called your “on-going balance,” and depicts the original amount of your bridging loan.

The next step is to calculate the amount of money that needs to be borrowed. This total amount borrowed is called the “Peak Debt.” This will include the loan balance on your existing home, the contract purchase price of the new home, and any purchase costs such as stamp duty, legal fees, and lender’s fees.

The minimum repayments on the bridging loan will generally be calculated on an interest-only basis. In many cases, this interest may be capitalised until the existing home is sold and added to the "Peak Debt."

The "Peak Debt" is reduced by using the net proceeds of the sale, which is obtained by subtracting any sale costs such as selling agent’s fees from the sale price, after the existing property is sold. The remaining arrears plus any capitalised interest becomes the “End Debt”. The "End Debt" is paid as a regular mortgage product.

Your bridging loan is APPROVED and you are good to go!

FREQUENTLY ASKED QUESTIONS

Minimum repayments, during the sale of the existing home, are usually calculated on an interest-only basis. You may even be able to capitalize all the repayments until the sale is completed depending on your lender. But you must keep in mind that if you do so then it will increase your "Peak Debt" and, therefore, increase the overall interest that you will pay.It is recommended that you make some repayments wherever possible so that if you have any difficulties during the sale of your property, you would not have repayments for another six months added to your loan amount. Instead, the amount that needs to be added to your loan will be reduced by whatever amount that you have already paid.You can calculate your potential minimum repayments with the help of our Basic Loan Repayment Calculator and anticipate any changes in the near future.






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