What Is Bridging Finance and How Does It Work?

By: Aaron Robbins0 comments

Upgrading, downsizing or relocating your family home can be an exciting yet busy time in anyone’s life. Whether you’re an investor looking to sell an existing investment property and purchase another, or are relocating yourself or your loved ones, chances are you’ve started the hunt for your next property early.

Amongst the pile of administration and family logistics of moving home, there comes the financial logistics. Bridging finance covers the gap if you’ve purchased your next property before selling the existing. We discuss more on bridging finance and how it works, below.

Bridging loans explained

Bridging loans work to provide a short-term financial conduit between the purchase of your new property while still waiting for the sale of your existing property (hence the name ‘bridging’ finance). This type of finance solution is ideal in the current hot property environment, where you need to be ready to strike in a fiercely competitive buyer’s market if you come across your dream property. Your bridging loan will cover the second property’s purchase price, giving you time to sell the first property, or provide you with the leverage to quickly secure a property at auction.

Loan Terms

Most bridging finance solutions provide an interest-only loan for up to six months if you’re purchasing an existing property, and up to twelve months if you’re buying a newly constructed property.

Open and closed bridging loans

If you know when your existing property will be sold (such as having a contract of sale drawn up), you can apply for a closed bridging loan. Typically, closed bridging loans come with more favourable loan terms than open bridging loans as there is more certainty for the lender that the existing property will be sold (and therefore they are viewed as lower-risk).

On the other hand, an open bridging loan is available when you have yet to find a buyer for your first property. It’s common for lenders to request additional information for an open bridging loan, such as evidence that the existing property has been listed on the market and that it’s not simply ‘planned’ to be sold.

Interest rates

Almost all financial products and solutions have different interest rates depending on the lender and the applicant’s unique personal and financial situation. The same is true for bridging loans. The interest rates on bridging finance are generally higher than other forms of home lending.

Lenders offering bridging finance vary significantly in terms of their loan conditions, terms and interest rates, however, as a private lending specialist, Diverse Funding Solutions has access to some of the most competitive interest rates in the private lending market.

Loan repayments

The repayment schedule for your bridging loan will differ depending on your lender. Some lenders will accumulate the interest, meaning that you don’t have to make any payments during the bridging period; instead, paying off the principal and interest costs when you sell your existing home. This can be beneficial for cash flow during the sale process, however, could mean paying a large interest bill at the end due to the compounded bridge loan interest.

Other lenders will work through a repayment schedule with you that is founded on an exit strategy and interest-only repayments throughout the bridging term. Of course, if you have an existing home loan, you’ll need to continue to make the repayments on your current mortgage.

Hot tip: some bridging loan borrowers choose to place short-term tenants in their existing home to ensure they have the interest costs covered until the sale goes through. The rental property market is incredibly buoyant at the moment, so finding a tenant may be easier than you think.

How much can I borrow under bridging finance?

Your borrowing power for a bridging loan at finance one depends on a few different factors:

  • The value of your current property. Property valuations will already be underway if you’re listing your existing home on the real estate market, so you’ll have a clear idea of your property value and whether you have enough equity to support the new loan.
  • The purchase price of your new property. (Remember that this includes costs such as conveyancing fees, building and pest inspection and stamp duty).
  • Your exit strategy or ability to repay the loan. Exit strategies might be to repay the loan with the new mortgage on the new house, the sale proceeds of the home or another expected transaction.

Accessing the right bridging loan for you

Not all institutions that offer home loans will offer bridging loans. Your bridging loan scenario may look completely different from someone else’s, depending on your situation. Working with over 200 of Australia’s best private lenders means that we can connect you with the best lender for your bridging finance requirements.

Our team is experienced in determining whether a bridging loan is right for you. We work with you to take some of the financial stress away so that you can enjoy your new property and focus on selling your existing home.

Reach out to Diverse Funding Solutions to discuss how a bridging loan could help you.

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Bridging Loans: Frequently Asked Questions

What is capitalised interest?

Capitalised interest refers to the total interest costs being added to the capital amount of your bridging loan at the end of the loan term, just before the loan is paid out in full. Bridging loans don’t offer principal and interest repayments, therefore, the longer that you take to sell the existing property, generally the more interest you pay.

What is peak debt?

Peak debt is the total amount you have borrowed, including all bridging loan costs, the balance of your existing loan on your existing house, the purchase price of your new property (including any legal or lender’s fees).

What is the maximum loan term on a bridging loan?

In most cases, bridging loans are short-term loans with maximum loan terms of twelve months.

What happens if my existing property doesn’t sell?

The full bridging loan amount plus all interest charges still need to be paid at the end of your bridging period, regardless of whether your current property has sold or not. If your property value drops, this can seriously impact your ability to repay the bridging loan.

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