What’s a Bridging Loan? And Should I Get One?
When you are looking to buy a new home while trying to sell your current one, finances can feel complicated and confusing. Do you sell first and hope you can buy another before you need to move in? (stressful!) Do you buy first and pay for two mortgages while trying to sell your current home? (expensive!) There is another option, called bridging finance or bridging loan, that you can get to manage the process of buying and selling your homes.
What is bridging loan?
Bridging loan, also known as a bridging finance, is basically a short-term loan that a lender will give you to finance the purchase of your new home while you are selling your current property. Bridging loans can also be used if you want to stay in your current home – and not sell it first – while building a new home.
How do bridging loans work in Australia?
When you need financial assistance to pay for your existing mortgage as well as your next property, you can apply for a bridging loan. A professional mortgage broker is a great option to see when you are considering bridging finance. Finding the right lender and bridging loans option is crucial to hassle-free finance during this time. Mortgage brokers have access to a range of lenders and home loan products to find one suitable for you.
The lender you choose will typically take over the mortgage on your current home and will also finance the purchase of your new property, including the purchase costs like stamp duty and lender fees. The total amount you will borrow under a bridging home loan is referred to as the Peak Debt. You will generally only have to make interest-only repayments but there are a number of finance options available depending on the lender you use.
When you sell your existing property, the proceeds will be used to reduce your Peak Debt and the remaining debt is known as the End Debt. The End Debt on a bridging home loan becomes your new standard mortgage going forward for your new home.
Benefits of using bridging finance
The main benefit to using a bridging finance when buying and selling homes close together is that it can allow you to borrow up to 100% of the new home’s purchase price as well as all associated costs. If you cannot afford two mortgages at the same time (but you will easily service the new mortgage once your current home sells) a bridging loan means you can take the pressure off your finances and focus on finding your next dream home and selling your first home at the right time.
Other benefits of bridging loans include:
- Not having to rent between the sale of your first home and moving into your next home.
- Being able to make an offer on your dream home even if you are not ready to sell your current home just yet.
- Using interest capitalisation feature of a loan where you can defer paying interest until the bridging home loan is closed (when you sell you first home and pay of the Peak Debt part of your loan.
Will a bridging loan be right for me?
Here’s our top tips for understanding whether bridging financing is right for you:
- Get a property valuation done on your existing home through your Brisbane mortgage broker so you can understand how much you can sell your home for and how much equity you have to play with.
- Do you have at least 50% equity in your current home? This will make your bridging finance application more attractive to a lender.
- Although you can use interest capitalisation during this time, it is a good idea to make some payments during the bridging period so you can minimise the amount of interest you will pay on the sale of your home.
- Do you have a Plan B if your home doesn’t sell quickly? It’s highly unlikely during this time with the property market so hot, however, it is a good idea to think about all your living and finance options while buying and selling homes.