Bridging Loans

Introduction

Bridging finance refers to a home loan that allows you to purchase a new home before you sell your current home while maintaining a mortgage over both properties for a limited period of time.

Using a bridging loan can have some solid advantages – most notably convenience and reduced stress – but it also has some downside.

This Fact Sheet is designed to give you an understanding of how bridging finance works – and understanding of the processes involved – and the considerations that will help you decide whether bridging finance is suited to your goals and objectives.


Terminology

Here are some terms that will assist you to understand the rest of this Fact Sheet:

  • Bridging Period – this is the timeframe of the initial bridging loan.  It is normally either 6 months or 12 months (depends on the Lender) from the settlement date of your new home.  This is therefore the maximum timeframe you are allowed to complete the sale of your current home

  • Peak Debt – this refers to the maximum (or peak) total debt that the Lender will approve and is comprised of your existing mortgage, the purchase price and costs for your new home, capitalised interest (see below) less any cash contribution you are making as a deposit or when settling the new purchase.  Most Lenders will only allow a Peak Debt that is equal to 80% of the combined value of both properties

  • End Debt – this is the amount of the final mortgage after you sell your current home and sales proceeds are used to pay down the Peak Debt.  The end debt cannot normally be more than 80% of the value of your new hone

  • Capitalised Interest – with most bridging finance arrangements the initial Bridging Period will be interest only and you won’t be required to make any payments.  As such, an allowance is made for the interest costs during the Bridging Period and these are added (capitalised) to the loan to form part of the Peak Debt

  • Nett Sales Proceeds – this the amount left over after you sell your current home, pay your Real Estate Agent etc.  While it is normal to use all these Proceeds to pay down your Peak Debt and achieve your End Debt you have the choice of retaining some of the funds, depending on your situation


When would I use a bridging loan?

As you could probably imagine, bridging finance is normally used when you want to buy a new home but have not yet sold your current home.

This can come about ‘accidentally’, i.e. you come across a home for sale that is ideal (or selling at a ‘discount’), and you don’t want to let the opportunity get away – or intentionally, i.e. you have planned to sell your current home and upgrade (or downsize etc) and you want to be able to settle on the new purchase before you stress about selling your current home.


What are the advantages?

Apart from the obvious advantage of allowing you to settle the purchase of a new home before you have the ‘cash’ from the sale of your current one – bridging finance allows you to avoid some of the negatives associated with upgrading or downsizing your current home.

If you’re trying to sell your current home while also looking for a new one the chances of you finding an ideal buyer at precisely the same time as finding your ideal new home are very small.  So, bridging finance:

  • Avoids the stress of trying to arrange simultaneous settlement of both properties;

  • Avoids the hassle and expense of storing furniture – or having to move twice;

  • Avoids the inconvenience and expense of short term rented accommodation;

  • Allows you to sell your current home without a ‘gun against your head’ which will often allow you to achieve a higher sale amount – especially if there is anything ‘unique’ about your current home;

  • Provides an opportunity, in certain markets, to achieve a preferential purchase price for your new home because you can move more quickly and don’t need to negotiate a simultaneous or delayed settlement; and

  • May allow you to purchase your next property without needing to make any initial cash contribution - depending on your situation.


What are the downsides?

There are some clear advantages to using a bridging loan, however you should also consider the following disadvantages and limitations:

  • Outside the major Banks and some of the larger 2nd Tier Lenders there aren’t a lot of Lenders that offer a bridging facility;

  • Because of this, Lenders tend to charge a premium – both during the Bridging Period and by not offering as competitive a Product for the End Debt.  (This varies greatly between Lenders – so, as always, it pays to do your homework or have us do it for you);

  • You will pay more interest because interest is accruing on the Peak Debt rather than just on the End Debt (had you sold your home 1st).  Some Lenders will allow you to pay the interest bill each month in order to avoid it capitalising to the total loan amount – and hence increasing your end debt – but regardless you will have an increased interest cost;

  • While bridging finance allows you more time to sell your home you still must sell it in a maximum of 12 months and normally within 6 months.  So, its important for you to assess whether the added costs of bridging finance are likely to pay off.  Put simply, if you think your local market is leaning towards being a “sellers’ market” (or even neutral) then allowing yourself extra time for a good marketing campaign is likely to work in your favour.  However, if you believe your local market is trending towards a “buyers’ market” then the longer you take to sell could mean the lower the price you’ll ultimately achieve – plus the extra costs of the bridging loan.


Conclusion

We hope that this Fact Sheet has given you greater insight into bridging finance – and the pros and cons of using it.

If you have any questions or need any assistance, please feel free to Contact Us.



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