Bridging Home Loans
As the name suggests, a bridging loan bridges the gap’ between two home loans. The lender you choose takes security over both properties and lends against these properties until the sale and purchase process on both is completed. During a bridging loan period, your home loan will generally be charged as an interest-only loan. Many lenders offer interest rates comparable to the standard variable rate, or only slightly above.
Bridging home loans are a good way to buy a new property before the sale of your existing home. They are commonly used to finance the purchase of a new property while your current property is being sold, but also provide finance to build a new home while you live in your current home.
Match Your Bridging Needs To The Right Home Loan
How does a bridging loan work?
Some lenders may allow you to capitalise the interest on a bridging loan, relieving you of the necessity of making loan repayments during the bridging period. If you choose to capitalise the interest you will most likely have a slightly higher new home loan to cover the capitalised interest.
With some lenders you can have up to 6 months to sell your home if you are purchasing an established home and up to 12 months if you are building.
When you sell your first property, the proceeds of the sale are applied to the bridging loan, and any remainder becomes the end debt or new home loan. At this stage your home loan will usually revert to the lender’s standard variable interest rate or the interest rate you have negotiated.
Bridging loans – what to consider
While in simple terms, funds from a bridging loan willbridge the finance gaps noted above, the right loan products for you will depend upon a number of factors:
- How long are the funds required for? Is this known?
- Do you have an unconditional contract on the property you are selling? Or are you yet to sell?
- Is your new home being built a new home?
- Are the properties for investment or primary residence/s?
- What is your ability to service or meet the repayments on your current loan and the bridging loan?
Your answers to these questions will define both the right bridging loan type for you and the amount you will be able to borrow. As with all loans, you need to be aware of the risks, talk through the pros and cons with your mortgage broker.
Capitalised interest loans
With a capitalised interest bridging loan, no repayments are required on the new loan while you are selling your existing home. Instead, a new loan is established to purchase the new home and payout the loan against your existing home.You continue making repayments on your existing loan, and in the meantime, interest is charged and accrues to your new home loan account as normal. You do not need to make any repayments on that loan for 6 months, or until you sell your existing home, whichever occurs first.
In most cases, you can borrow up to 100% of the value of your new home plus any associated fees & charges. Typically your combined loans cannot exceed 80% or 85% of the combined value of both your new and existing properties, after taking into account the amount of interest that will be charged on the new loan during the changeover period.
Bridging loans – a case study
A couple owned their home unencumbered and wanted to buy and relocate prior to the sale of this property. They believed that their property would present better for sale without their outdated furniture and also, they did not want to suffer the daily hassle of keeping the house in tip-top order for prospective buyers. As vendors, the couple were also reluctant to allow a longer than normal settlement time frame.
Their current property is valued at $450,000 and their new home is $568,000. They are on limited incomes and so could not afford a loan of $500,000. They elected to buy the new property, move in and use a capitalised interest loan. This couple sold their existing home for $612,000 within 4 weeks, but it’s important to note that there was still therisk that the current home might not have sold within the specified 6 months.
Many home loans these days have a loan portability feature in part or total. Portability allows you to transfer your current loan from your old property to your new one, thereby avoiding many of the setup and ongoing costs associated with a new loan. Not all lenders and loans will have this feature so make sure you check with your mortgage broker when you setting up your home loan. You can read more about loan portability in our home loan features section.
Bridging loan pre-approval
Understanding which option is the right one for you before signing a contract for the sale or purchase of your property is essential, so organise a bridging finance pre-approval by talking to your local Loan Market mortgage broker on 13 5626 (13 LOAN).