Bridging Loans

A bridging loan is a loan that bridges a gap when you are trying to secure a mortgage for a new property while you are selling your existing property. A bridging loan will allow you to buy a new place while you wait for the old one to sell.

Bridging loans are normally interest-only loans that carry special lender conditions and would have a limited loan term.

There are two types of bridging loans:

  • Closed bridging loans –these are generally suited to borrowers who have already agreed on sale terms of their existing property and the date the contract for the sale will settle. Once the property settles on the pre-arranged date the proceeds from the sale are used to pay out the principal of the bridging loan.
  • Open bridging loans – the loan does not have an agreed settlement date but generally has a loan term of 6-12 months. These loans are more suited to people that have found their new home but are yet to find a buyer for their existing home. Lenders will normally require you to have a certain level of equity in your existing home and proof that the existing home is on the market. It is also common for lenders to charge a higher level of interest on this type of bridging loan.

Bridging loans normally works as follows:

  1. One lender provides loan funds for the new and existing property.
  2. The loan amount borrowed for a short period of time is known as the peak debt.
  3. The repayments on your loan will change during the bridging period and will be an increased payment for one loan or payment on two loans.
  4. When you sell your home the proceeds from the sale is used to pay down the balance of your loan/s and the residual loan balance remains. This is also known as the ongoing balance or end debt.
  5. The bank may or may not offer to convert you to a new loan product, such as a fixed-term loan or one with principal and interest repayments.
  6. Your new or remaining loan repayment amount and interest rate will most likely change. It is a good idea to ask what the loan terms and conditions will be after the bridging loan period.

A bridging loan ensures you can buy your new property right away without waiting for your current home to sell and may mean you could avoid having to rent a home between the sale of your new home and moving into your new home.

Whilst a bridging loan will help you achieve your objective of purchasing your new home it is important to note the disadvantages of using a bridging loan to finance a property purchase:

  • If you do not sell your old home within the required time the interest rate on your loan may increase.
  • Interest costs will be higher as it may be accruing on the loans and because the overall level of debt has increased.
  • Bridging loans may introduce additional valuation, application and loan fees payable to the lender.

A bridging loan may not be the only strategy to purchase a new home before you have sold your existing home. You may be able to negotiate a longer settlement period for your new home or obtain an agreement to alter the purchase contract and add a ‘subject to finance’  clause on the contract, meaning the contract on your new home would not become unconditional until you have sold your existing home.

Construction Loans

A construction loan is a type of home loan designed for people who are building a home or doing major renovations, as opposed to buying an established property. It has a different loan structure to the type of home loans used to buy an established property.

A common feature of a construction loan is a progressive drawdown. You receive instalments of the loan amount at various stages of construction rather than receiving it all at once at the start of the loan period.

A number of lenders offer construction loans that are interest-only during the construction period and then revert to a standard principal and interest loan. As construction loans are progressively drawn down, interest is normally calculated based only on the funds used so far. For example, if by the third progress payment only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.

How do progress payments work?

Once a construction loan has been approved and the property is being built, lenders will generally make progress payments throughout the various stages of construction. Progress payments will typically be paid directly to the builder at the completion of each stage.

Slab down or base: This is an amount to help you lay the foundation of your property. It can cover the levelling of the ground, as well as the plumbing and waterproofing of the foundation.

Frame stage: This is an amount to help fund the build the frame of the property. It can cover partial brickwork, roofing, trusses and windows.

Lockup: This is to help you put up the external walls and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).

Fit out or fixing: This is to help you install the internal fittings and fixtures of the property. It can cover plasterboards, the part-installation of cupboards and benches, plumbing, electricity and gutters.

Completion: This is for the conclusion of contracted items (such as final payments for builders and equipment), as well as any finishing touches such as plumbing, electricity, and overall cleaning.

For each stage of the construction process, you will usually have to confirm that the work has been done, complete and sign a drawdown request form, and send it to the construction department of your lender. Your lender may also request an invoice from your builder for the cost of the work done.

How to get a construction loan

Gaining approval for a construction loan is a different process to applying for a standard home loan on an existing property.

In addition to being subject to normal lending criteria and income and expense documents, banks and lenders normally require you to provide documents including council plans and permits, a copy of your fixed-price building contract (for cost-plus contracts this will differ) and any applicable insurance (such as public liability insurance and builders all risk insurance).

When you apply for a construction loan, the lender may consider the expected value of the property upon completion of construction, as well as the total amount required to pay the builder. An independent property appraiser will then typically estimate the expected value of the property when completed. The lender will typically also require further valuations and inspections during the project.

If the loan is approved, your lender will give you a loan offer. You will then have to make a deposit, as you would with most other types of home loans. This acts as security at this stage of construction. A larger deposit can help to convince your lender that you are a less risky borrower. You’ll typically need at least a 5% deposit, keeping in mind that you may have to pay lenders mortgage insurance if your deposit is less than 20%.

Owner-builder mortgages

An owner-builder loan is specifically designed for people who intend to build the house (or contract trades directly) without the help of a professional third-party builder.

Many lenders only finance the construction of homes that are built by licensed builders. Lenders may be hesitant to accept applications for owner-builder loans, as they use the property as security against your mortgage. If you’re building this property yourself, you are not considered to be a licensed builder and they may consider you to be a higher risk.

Lenders who do give owner-builder loans may limit the maximum loan to value-ratio for the loan. This means you may need to pay a higher deposit than you would for a typical construction loan. An additional interest rate loading or fees may also apply to owner-builder loans.

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