Bridging Finance: House Purchase Aid for Smooth Moves

By: Aaron Robbins0 comments

Moving house can be one of the most exciting yet stressful and logistically complicated times in your life. Thankfully, it doesn’t need to be as financially complicated or stressful. Bridging finance can help homeowners smooth the process of selling one home and purchasing another.

If you want to learn more about how a bridging loan could smooth your move, then keep reading as we explain how bridging loans could help reduce the financial stress of purchasing a home.

What is a bridging loan?

Bridging loans are a form of finance that effectively allow you to finance the gap between selling an existing property and purchasing another. The benefit of taking out a bridging loan is that you can take advantage of opportunities in the property market when they arise without worrying about whether you’ve sold your existing property or not.

How does a bridging loan work?

Some lenders offer bridging loans by taking on the balance of your existing home loan and adding the purchase price, stamp duty, lender’s fees and legal fees associated with the purchase of your new house to the mortgage. This is what’s referred to as the Peak Debt amount.

Once your existing property sells, the net proceeds are then used to pay down the peak debt amount. The remaining debt is called the ‘end debt’ and generally converts to a standard mortgage. While you have the bridging finance attached to your existing mortgage, you are typically only charged the interest costs (meaning that you make interest-only repayments, not principal and interest repayments like most home mortgages).

Understanding compounded bridge loan interest

Compounded bridge loan interest is the interest that accrues on a bridge loan and is added to the principal amount of the loan, which then accrues interest as well.

The interest on a bridge loan can be compounded daily, weekly, monthly, or annually, depending on the loan terms. Compounding means that the interest that accrues on the loan is added to the principal, and interest is then charged on the new, higher principal amount.

For example, let’s say you take out a bridge loan for $100,000 at an interest rate of 10% per annum. If the interest is compounded monthly, then at the end of the first month, you will owe $100,833.33 ($100,000 + 10%/12 of $100,000). The interest for the next month will be calculated based on this higher amount, and so on, until the loan is repaid.

Are there different types of bridging loans?

There are two forms of bridging loans: open and closed.

Open bridging loans are designed for when you haven’t yet sold your current house. If your home doesn’t end up selling, then you need to repay the total cost of the bridging loan at its maturity date. An open bridging loan will generally come with a longer bridging period than a closed bridging loan, allowing you the maximum amount of time to find a buyer.

Closed bridging finance, on the other hand, is better suited for when you’re certain of your existing property’s sale date. This could be because you have a very engaged prospective buyer or perhaps even have a contract signed.

How long is the bridging loan period?

Bridging loans are not long-term; they are only designed to finance the bridge between buying and selling properties. Generally speaking, the maximum loan term under a bridging loan is 24 months. This makes bridging loans a short-term loan option.

How can I use bridging finance for house purchase expenses?

If you’re looking to sell your existing home but have already found a new property, then a bridging loan can help make the process as smooth as possible by creating some financial breathing space. Today’s real estate market means fierce competition for desirable properties. While this is a great thing if you’re looking to sell your current home (and it’s a desirable home), it can also mean that you need to be ready to pounce on opportunities when they present themselves in terms of getting into your new property.

Having a bridging loan up your sleeve means that you can confidently (and comfortably) move into your new home without needing to balance or manage the exit of your current property and align your settlement dates. This is because a bridging loan covers the purchase costs. Once you’ve moved into your new home and have settled in, you can then focus your energy and attention on the sale of your existing property without being rushed, trying to move out of one property and into another with a very limited window of time.

Things to consider before accessing a bridging loan

  • If your existing loan is a fixed-rate loan, there may be an interest adjustment made on top of any break costs or exit fees.
  • Property valuations may be required before your property value is known, which can take time in a busy market.
  • It’s important to ensure that you have sufficient cash flow to have your interest costs covered while still repaying your current mortgage.
  • Mortgage application fees may apply for some lenders, including if you use your existing lender.
  • The bridging loan will be added to your existing home loan balance — it’s important to ensure that you’re able to sell your existing home for a sufficient amount to cover your bridging loan.
  • The more equity you have in your existing property value, generally, the better borrowing power you’ll have when applying for a bridging loan.

Who offers the best bridging loans in Australia?

Lenders offering bridging home loans vary in Australia, however, most bridging loans offered by traditional lenders are typically restrictive, with business owners or those with bad credit finding them difficult to access (even through a mortgage broker). Instead, why not consider a private lending broker?

At Diverse Funding Solutions, we are one of Australia’s fastest-growing private lending brokers, providing you with access to over 200 of Australia’s top private lenders. This means that we can help source the best bridging loan solution for you, depending on your unique personal and financial circumstances. Our bridging loans can be approved and settled in a matter of days, meaning that you can access the fast funds you need to move smoothly into your next home.

To find out more about how bridging finance could work for you, speak to our team.

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