Bridging Finance
What is Bridging Finance?
Bridging finance is a short-term loan that "bridges" the financial gap between buying a new property and selling your existing one. It allows you to secure your new home while giving you time to sell your current property without the pressure of a quick sale.
How does it work?
Imagine this scenario:
You find your dream home priced at $750,000. Your current property has a market value of $500,000 with a remaining mortgage of $200,000. This means you have $300,000 in equity (market value - mortgage).
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Loan amount: Based on your equity, you can apply for a bridging loan of up to 80%, which would be $240,000 ($300,000 equity x 80% loan-to-value ratio).
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Loan term: You opt for a typical 6-month bridging loan.
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Repayments: As bridging loans are usually interest-only, you'll only pay the interest accrued during the 6 months. Let's assume the interest rate is 8% per annum.
Calculating the interest:
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Monthly interest rate = 8% per year / 12 months = 0.67% per month
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Monthly interest payment on the loan amount = $240,000 x 0.67% = $1,608
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Therefore, you'll make monthly repayments of $1,608 to cover the interest during the 6-month loan term.
Important to note: This is a simplified example. The actual loan amount you qualify for will depend on your individual circumstances and lender assessment.
Repayment Options
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Full repayment: You pay back the entire loan amount upon selling your existing property.
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Capitalization of interest: Unpaid interest is added to the loan amount, increasing the total amount to be repaid.
Benefits of Bridging Finance
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Secure your dream home: Don't miss out on your ideal property while waiting to sell your current one.
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Avoid selling pressure: Take time to find the right buyer for your existing property without the stress of a tight deadline.
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Potential tax benefits: Consult a tax advisor to explore potential advantages.
Drawbacks of Bridging Finance
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Higher interest rates: Bridging loan interest rates are generally higher than standard home loans.
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Increased debt burden: If your property takes longer to sell, you might face a larger debt due to ongoing interest accrual.
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Exit fees: Some lenders may charge fees for early repayment of the bridging loan.
Eligibility and Suitability
Who can apply?
Bridging finance is suitable for individuals with sufficient equity built up in their existing property.
Factors to Consider:
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Financial situation: Carefully assess your ability to manage the bridging loan repayments on top of your existing financial commitments.
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Selling confidence: Be confident in your ability to sell your existing property within the loan term to avoid extending the loan and incurring additional interest charges.
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Alternative options: Explore alternatives like renting back your existing property while purchasing the new one.
How a Finance Broker Can Help
Bridging finance can be complex. A finance broker can:
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Navigate the complexities: Brokers have the expertise to guide you through the intricacies of bridging loans.
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Access to lenders: Brokers have connections with various lenders offering competitive rates and loan terms.
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Streamlined application: Brokers simplify the application process by handling paperwork and ensuring a smooth experience.
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Negotiation: Brokers can leverage their experience to negotiate favourable interest rates and loan features on your behalf.
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Financial guidance: Brokers assess your financial situation and recommend suitable bridging loan options based on your specific needs.
Frequently Asked Questions (FAQs)
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What happens if my property takes longer to sell? You may need to extend the bridging loan term, incurring additional interest charges. Discuss this possibility with your broker beforehand.
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Are there any alternatives to bridging finance? Consider renting back your existing property while buying the new one or exploring a delayed settlement with the seller of your new property.
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What fees are associated with bridging loans? Bridging loans typically involve establishment fees, valuation fees, and potential exit fees for early repayment.
Disclaimer: This webpage provides general information only and does not constitute financial advice. Please consult our finance broker for personalised advice regarding your specific situation.