The bridging loan is an intermediary between your mortgage and the loan you’ll need to purchase your next house. However, the mechanism behind the bridging loan depends on the borrower’s specific circumstances.
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What is a Bridging Loan?
For example, someone secures a bridge loan; the bank and private lender usually take over the mortgage of the property and finance the purchase of the house. Whereas money taken out is known as Peak Debt. It is composed of the remaining balance from the mortgage of an existing property. The purchase cost of the new home contract and the costs associated with the purchase, such as legal fees, stamp duty, and lender fees, are all-inclusive in the bridging loans.
The minimum payment for bridging is determined on an interest-rate basis. The interest capitalization will continue until the day of the closing or the sale of the house. It’s on top of the maximum amount of debt. When you sell your first house, the net payment from the proceeds is included in the overall process of bridging.
How Bridging Loans Work in Australia?
Bridge loans can help homeowners to purchase a new home while their existing home is on sale. You can get a bridging loan from banks and private lenders in Australia. The borrowers use the equity as the deposit or full payment for their new property while they wait for their current property to sell. This loan gives homeowners some extra time to sell their current home. The interest rates are slightly higher than normal home loans.
Businesses need bridge loans when they need money to cover expenses while waiting for their payments.
A bridging loan can be approved on the same day by private lenders. The duration of the process can vary when you choose to take out a different type, for instance, a home loan. Getting approval for complex scenarios can take longer than usual. Once approved, the bridging loan duration is likely to last the loan for six (6) months or 12 (12) months at the maximum when purchasing a new property or building a new home.
How can I be eligible, and what can I do to get qualified for a bridging loan?
The Home Equity: Considering the loan required, the lender will allow the borrower access to and analyze the equity in the home. Typically, the greater your assets, the higher your chance of getting a bridging loan.
Without or with End Debt: Several banks offering bridge loans assume that there is a presence of an end debt. In addition, if there is no end Debt, you’re cutting the size of your home, and the cost related to the loan you are applying for will be higher.
Max End Debt: If you’re facing the possibility of an end-of-the-line debt, take note that the amount you pay for it can’t exceed the value of the property you bought. Whereas, if you have an End Debt greater than 20% of the value of the property, you’re required to pay for the Lender’s Mortgage Insurance (LMI).
Additionally, you need to provide a sale agreement from your previous lenders to prove that the property has been sold. A sale contract is required for approval.
The Current Loan: The qualifying criteria for a bridging loan are typical; the lender is in the best position to aid. In contrast, if the current lender does not offer Bridging loans, another lender could be able to help you with bridge financing. However, the future lender insists on taking over the current loan to pay the existing lender.
Interest-only: The loan interests only; for instance, if the borrower proceeds with early termination, it can cause break charges to be incurred due to early termination or cancellation of the bridge loan.
Lastly, there are countless lenders in Australia providing bridging loans reason is the growing popularity of such types of loans. In addition, apart from conventional banks, a variety of private and non-bank lending institutions, including fintech companies, are offering Bridging loans. All around Australia, the online quick-term application process for Bridging loans from various lenders is simple.
Types of Bridging Loans
Generally, the bridging loans are of two types that are typically contingent on the state of the property sale:
Closed bridging loans: In this type of loan, the lender knows how you will pay back the loan with the exact date. This is known as an “Exit Strategy” as the borrower knows how to pay it back.
Open Bridging loans: This loan is best if you do not have a clear exit strategy, although you will obviously have to pay back the loan. The open bridging loan does not have a specific settlement time/date but instead has a general loan term (usually six or 12 months).
A short-term bridging credit comes with numerous advantages that include:
- Purchase now and sell it later: There is no reason to abandon your dream home when you attempt to sell your current home.
- Leisurely Sale: The house with a break will allow you to avoid any substantial loss in the event of the rush to sell a home.
- Avoid making the same error twice: Renting a house (and possibly the storage space) after you’ve lost a residence and then buying a home is twice the amount to move could be expensive and complicated.
- Interest and payments: The lenders permit the interest to be capitalized. In comparison, the customer can pay the loan when the home sells (which means that you aren’t required to pay for the term of your loan).
- Interest rates for conventional loans: Some lenders offer higher interest rates for bridge loans. At the same time, the good news is few lenders have standard variable rates on similar loans.
- Advance Instalments: If you pay interest and principal on your loan during the bridging time, you can lower the interest cost.
When borrowing, bridging loans is one of the best choices you can have. However, always consider the potential disadvantages.
- The uncertainty selling risk: Bridging loans are loans for short periods that typically last between 6 and 12 months. You could be at risk of selling the home before the conclusion of the bridging loan term. You may come under pressure to sell your home lower than you’d like due to time-sensitive situations. It is significant to remember the more time it takes to market your home, and the longer it takes, the higher the interest you’ll have to pay on the loan.
- Monthly compounded interest: Interest charged on a monthly basis means that the more time it will take to current market property, the rate of interest and credit on your loan will increase. If you do not sell your home within the time frame of the bridging loan, you will likely be assessed a higher interest rate.
- No option to redraw: If you decide to pay during the bridging time, it will be impossible to draw those funds again.
Are these the right choice for you?
A valuation of your current property to know the price you’ll be able to market will help you make an informed decision.
Find out more about the location where your property is situated and the kind of property you’re looking to sell, as well as actual market trends. However, it will also give you an understanding of the time it could take to sell your home.
Additionally, consider the time for settlement (which generally lasts 5-9 weeks). Moreover, be aware that most bridge loans are temporary and only valid for 6-12 months.
Some lenders may suggest that you have a minimum of 55 percent equity in your current property before considering a bridging loan to avoid paying an enormous amount of interest per month.
If your financial situation permits it, make regular payments over the bridging time to avoid the accumulation of interest and reduce the total debt.
What are the alternatives for bridging finance?
If you are planning to buy an investment property before selling the one in hand, it is vital to weigh all options to ensure you can pick the best that suits your situation and requirements perfectly.
A bridging loan isn’t the only choice available. It is also possible to consider:
Modifying your purchase contract: including a “subject to purchase” clause in the contract that you sign for your new residence means it will not be binding until you’ve sold the previous one.
You can negotiate a more extended settlement period on the new home you are buying, giving you the additional time you may have to sell the previous property before the loan for the new one starts.
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