Bridging Finance in Australia
Are you financially trapped between the purchase of a new home and the sale of your existing one?
At ARG Finance, we can assist you with bridging finance in Melbourne that can make things less challenging. Our experts are here to help you in crossing over any and all kinds of financial situations and keeping you well-informed every step of the way.
TYPES OF BRIDGING LOANS
There are two main types of bridging loans available:
- Closed Bridging Loans
- Open Bridging Loans
Closed bridging loans have been named according to their function. In this case, the date for exiting the loan is pre-agreed upon before finalising 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 take out this type of loan.
If you have already found the property of your dreams, but do not have an exact date to exit the bridging finance because 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.
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 home loan can help with your finances. This loan type is different from a home loan or construction loan. Before you take the plunge, we advise you to talk to our bridging finance brokers who can guide you through the process.
As an experienced bridging finance company, we have knowledgeable brokers who can give you invaluable advice on various factors such as bridging loan rates while also clearing your doubts about a bridging loan and its benefits during the process of buying a home.
Loan Benefits
- 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 until 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.
Qualifying Requirements
In order to qualify for bridging finance for property, you will need 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 loan keeps building up considerably.
REPAYMENT CALCULATIONS
During the sale of the existing home, minimum repayments are usually calculated on an interest-only basis. You may even be able to capitalise all the repayments until the sale is completed depending on your lender. However, you must keep in mind that doing so will increase your peak debt and therefore increase the overall interest that you will pay.
It is recommended that you make repayments whenever possible so that, if you have any difficulties during the sale of your property, you will 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 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. This will give you a good idea of what to expect when it comes to bridging finance rates so you can weigh up the pros and cons.
MAKING REPAYMENTS
Your loan serviceability is calculated depending on your ability to repay the end debt. Your lender may allow you to 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’ which takes into account your bridging loan interest rate.
LIMITATIONS
When taking a bridging loan, you will have about six months to sell the existing property or a period of 12 months, if the new property is still under construction. If you are unable to sell off your property within the aforementioned time periods, the loan will be reviewed and new arrangements might be put in place.
Explaining the Loan Process
STEP ONE
When you take out bridging property finance, 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.
STEP TWO
The next step is to calculate the amount of money that needs to be borrowed. The total amount that is borrowed is called the “peak debt” which 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.
STEP THREE
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 FOUR
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.
STEP FIVE
Your residential bridging finance is approved. Heave a sigh of relief and make the jump to your new home. You are all set to go!
Frequently Asked Questions
What is a bridging loan?
Bridging loans are a type of short-term financing used to bridge the gap between two transactions. They’re typically designed to provide immediate cash flow to a borrower who needs to purchase a new property before selling their existing one. The loan is secured against the borrower’s current property and the amount borrowed is based on the value of that property.
How much deposit do you need for bridging finance?
The amount of deposit required for bridging finance can vary depending on a range of factors. This includes the value of the property being used as security, the loan amount and the lender’s specific requirements. Generally, lenders may require a deposit of 20-30% of the purchase price of the new property in addition to any outstanding mortgage on the current property. However, some lenders may allow the deposit to be paid using equity from the current property.
Is a bridging loan a good idea?
It depends on the individual circumstances of the borrower. They can be a good option if you need to access funds quickly, but they typically come with high interest rates and fees. Borrowers need to be confident they can repay the loan in full within the agreed term. It’s essential to consider the pros and cons and only proceed if it’s the right option for your situation.
How does a bridging loan work in Australia?
If you opt for a bridging home loan, the lender will take over the mortgage on your current property and finance the purchase of your new property. This combined amount is known as the ‘peak debt’, which includes the balance of the loan on your current home, the purchase price of the new property and any other associated costs such as stamp duty. Once you sell your existing property, the funds received from the sale of the property will be used to reduce the peak debt.
Get in Touch with ARG Finance Today
If you’re looking for a trusted bridging loans consultant, get in touch with ARG Finance. Call us on 1300 511 655 or send an email to [email protected] for expert advice.