Looking to sell your current property and upgrade to another? Here’s all you need to know about bridging loans.
A bridging loan is a short-term loan that can be used to manage the transition between buying a new property and selling your existing one.
It can also provide finance to build a new home while you continue living in your current place.
In most cases, a bridging loan gives you six months to sell your existing property, or 12 months to construct a new one.
The two types of bridging loans
A lender will assess the level of equity available in your existing home and then they may:
Offer a single loan taking both properties as security: They will then give you 6-12 months to sell your property. During this period you’ll likely only have to make interest payments. Then, once you’ve sold your property the proceeds will be allocated towards your overall debt. The remainder of your debt will then either revert to principal-and-interest repayments, or you may have to enter into a new loan.
Offer a separate loan for the property being purchased: Under this scenario, you won’t need to make loan repayments during the bridging period. Instead, interest accrues on the new loan, and you keep making the usual repayments on your existing home loan. When your existing property is sold and the original home loan is paid out, the outstanding debt on the new property is renegotiated.
How does it work?
Okay, let’s say the balance of the loan on your existing property is $150,000, and you’ve borrowed another $450,000 to purchase a new property.
Your peak debt is now $600,000, which includes the balance of the loan on your existing home, the contract purchase price of the new home, as well as purchase costs such as stamp duty, legal fees and lenders fees.
So $150,000 + $450,000 = $600,000 short term debt. Simple so far, right?
Okay, now let’s say you sell your existing property and the net proceeds come to $420,000.
That money goes pays off the $600,000 debt, leaving you with an end debt of $180,000, plus any capitalised interest.
What to be aware of
Bridging loans aren’t without risk.
The main one is that if you fail to sell your home within the bridging period, you may have to accept a lower offer than you’d hoped for.
Let’s use the above figures once more as an example.
Say you’ve reached the final month of your bridging loan and still haven’t sold your house, and then someone lowballs you $30,000 less than you’d hoped for.
If you accept the offer and sell your existing property, the net proceeds will come to about $390,000.
That would leave you with an end debt of about $210,000, plus any capitalised interest.
Rest assured, it takes on average between 25 and 60 days to sell a property in Australia, depending on factors such as where you live and the time of the year, according to CoreLogic figures.
So even if your home fell on the upper end of that scale, it would still leave you with plenty of time for the settlement to go through.
A few final points
Most lenders will only offer bridging finance if there will be an end debt. That said, it’s still possible to secure bridging finance if there won’t be an end debt, but fees will be higher.
Also, if you need to go through a new lender, they’ll have to pay out the existing lender. If you’re on a fixed rate loan, early termination may result in break costs.
If you’d like to find out more about bridging loans, give us a call, we’d be happy to run through your options with you.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
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