Are you financially trapped in between the purchase of your new home and the sale of your existing one? Well, this where a bridging loans can help you. We are here to assist you in crossing over any kind of financial situations during this process and to keep you well- informed at every step, all the way till the end.
When & why consult a mortgage broker?
The sale of a property does not always happen instantly and there might be a delay with the funds. This is when a bridging loan can help with your finances. This loan type is different from a home loan or construction loan. So, before you take the plunge, we advise you to talk to our mortgage brokers who can lead you through the process and make it an easy ride for you.
A mortgage broker will give you invaluable advice while also clearing out your doubts about a bridging loan and its benefits during the process of buying a home.
Bridging Loan Facts
Types of bridging loans
There are two main types of bridging loans available:
- Closed Bridging Loans
- Open Bridging Loans
Closed Bridging Loans have been appropriately named to their function, because in this case the date for exiting the loan is pre-agreed upon before finalizing the date of repayment of the bridging finance. If you are a homebuyer who has already done an exchange on the sale of their existing property, then you can avail this loan.
If you have already found the property of your dreams, but do not have an exact date to exit the bridging finance since you did not put your existing home on the market, then you should go for an open bridging loan. The standard limit for this type of loan is twelve months. The bank would most likely negotiate an extension if needed as long as you pay the interest during the repayment period and the property has not collapsed.
- You can confidently search for a new home even though you have not made a settlement on your existing property.
- You can choose between principal and interest, or interest-only repayments.
- You can use the proceeds from the sale of your home to reduce the balance on your bridging loan following the settlement.
- You can make unlimited lump sum payments, depending on the terms of your finance.
- You can purchase a new property and not have to sell your existing property first.
- If you are building a new property you can still stay at your existing home till completion of construction.
- A bridging loan term of six months means less pressure to sell quickly.
- You get a flexible repayment plan to suit your individual needs.
In order to qualify for a bridging loan, you will require to have sufficient equity in your homes. Not having sufficient equity is the reason why people find it difficult to sell their existing home. This means that the interest they end up paying on the bridging loan keeps building up considerably.
Explaining the Loan Process
When you take out a bridging loan, the lender will take over the mortgage of your existing property while also financing the purchase of the new property. The amount of your commitment is determined by adding the value of your new home to your outstanding mortgage of the existing home, after which the approximate selling price of the existing home is subtracted. The balance is called your “ongoing balance,” and depicts the original amount of your bridging loan.
In the next step is to calculate the amount of money that needs to be borrowed. This total amount that is borrowed is called the “Peak Debt”, and will include the loan balance on your existing home, the contract purchase price of the new home, and any purchase costs such as stamp duty, legal fees, and lender’s fees.
The minimum repayments on the bridging loan will generally be calculated on an interest-only basis. In many cases this interest may be capitalised until the existing home is sold and added to the Peak Debt.
Step 4 :
The Peak Debt is reduced by using the net proceeds of the sale, which is obtained by subtracting any sale costs such as selling agent’s fees from the sale price, after the existing property is sold. The remaining arrears plus any capitalised interest becomes the “End Debt”. The End Debt is paid as a regular mortgage product.
Your bridging loan is approved. Heave a sigh of relief and make the jump to your new home. You are all set to go!
Frequently Asked Questions
Minimum repayments, during the sale of the existing home, are usually calculated on an interest-only basis. You may even be able to capitalize all the repayments until the sale is completed depending on your lender. But you must keep in mind that if you do so then it will increase your Peak Debt and, therefore, increase the overall interest that you will pay.
It is recommended that you make some repayments wherever possible so that if you have any difficulties during the sale of your property, you would not have repayments for another six months added to your loan amount. Instead, the amount that needs to be added to your loan will be reduced by whatever amount that you have already paid.
You can calculate your potential minimum repayments with the help of our Basic Loan Repayment Calculator and anticipate any changes in the near future.
Your loan serviceability is calculated depending on your ability to repay the end debt.
Your lender may allow you choose either to capitalise your repayments by adding them to the total amount of the loan, or to continue and pay them. If you continue to make repayments, then it will stop the total amount of the loan from billowing and limit the amount of additional interest from being charged.
You can check your repayments with the help of our how-long-to-pay calculator here.
When taking a bridging loan, you will have about six months to sell the existing property or even a period 12 months, if the new property is still under construction. If you are unable to sell off your property within the above mentioned time periods, then the loan will be reviewed and new arrangements might need to be put in place.