Bridging Loans

Bridging Loans

Trying to co-ordinate the sale of your existing home with the purchase of a new property can be herculean feat. If you can't achieve simultaneous settlement, bridging loans are often used to cover a finance gap between the purchase of a new property and the sale of an old property.

Many lenders offer bridging loans at standard home loan interest rates and sometimes even with the ability to capitalise interest until you sell. You do need to be very careful with the size of debt and cost of these kinds of loans, but they certainly do give you the flexibility to buy your new property before you have sold your existing one.

How do Bridging Loans work?

Bridging loans can be complex and options are as varied as there are scenarios. While in simple terms, funds bridge the finance gaps noted above, the right loan products for you will depend upon a number of factors:

1. How long are the funds required for? Is this known?
2. Do you have an unconditional contract on the property you are selling? Or are you yet to sell?
3. Is your new home being built - a new home?
4. Are the properties for investment or primary residence/s?
5. What is your ability to service or meet the repayments on your current loan and the bridging loan?

What options are available?

Your answers to the previous questions will define both the right loan type for you and the amount you will be able to borrow. Different lender's rates and offers will of course relate to the risk involved for the lender. You might however be surprised just what is available. With some lenders you can have up to 6 months to sell your home if you are purchasing an established home and up to 12 months if you are building. At a high level, dependent upon your situation, options include:

1. LVR (Loan Value Ratio) from 70% to 100%
2. Principal and Interest or Interest only loans
3. Capitalised interest

Need Help or More Information on Bridging Loans?

To understand what is available to you in your situation, talk to a local mortgage broker or contact us via email and you will have an understanding of your options within 2 business hours.

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Capitalised Interest Loans

A number of X Inc lenders, including Westpac, St George and Adelaide Bank offer capitalised interest bridging loans.  Here is how they work: Rather than needing to make two sets of loan repayments while you are selling your existing home, no repayments are required on the new loan for the changeover period.

Typically, a new loan is established to purchase the new home and payout the loan against your existing home, if that loan is with a different bank.You continue making repayments on your existing loan. In the meantime, interest is charged and accrues to your new home loan account as normal. You do not need to make any repayments on that loan for 6 months, or until you sell your existing home, whichever occurs first.

In most cases, you can borrow up to 100% of the value of your new home plus any associated fees & charges. Typically your combined loans cannot exceed 80% or 85% of the combined value of both your new and existing properties, after taking into account the amount of interest that will be charged on the new loan during the changeover period. For the option that best suits you,  talk to a mortgage broker.

A typical couple who used a capitalised Interest bridging loan

This couple are the clients of an X Inc mortgage broker. They own their home unencumbered and preferred to buy and relocate prior to the sale of this property. They believed that their property would present better for sale without their outdated furniture and also, they did not want to suffer the daily hassle of keeping the House in tip top order for prospective buyers. As vendors, the couple were also reluctant to allow a longer that normal settlement time frame. Their current property is valued at $450,000 and their new home is $568,000. They are on limited incomes and so could not afford a loan of $500,000.  They elected to buy the new property, move in and use a 'Go Between Loan' which capitalises their interest and allows them to complete the move without breaking their budget. This couple sold their existing home for $612,000 within 4 weeks, but the risk was still that the current home might not have sold within the specified 6 months. You need to be aware of the risks and talk through the pros and cons with your mortgage broker.  That is the question a lender will ask and this is where a good mortgage broker will make the difference.

Get Bridging Finance Pre-Approval

The safest way to approach bridging finance is to get your finances pre-approved before you go to contract on either your sale or purchase. There should be almost no cost involved in doing this and your local mortgage broker can help you get it in place. Once you know your maximum limit and what you need to do, the entire selling and buying process becomes a lot less stressful. If you are tempted to move forward without pre-approval, you only have to think of the many examples of people who have purchased a property at a great price as a result of the vendor being under significant pressure to sell because to finance issues. Talk to a local mortgage broker, apply for pre-approval or contact us via email to locate a broker who might suit you.

Bear in mind that the amount you can borrow will be relative to the amount the lender values your old home at, not what you may have it on the market for.