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:
- One lender provides loan funds for the new and existing property.
- The loan amount borrowed for the short period of time is known as the peak debt.
- The repayments on your loan will change during the bridging period and will be an increase payment for one loan or a payment on two loans.
- 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.
- 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.
- 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.
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