Bridging Loans – How does it work?
In a perfect world your next dream home would come up for sale at the same time as you have buyers ready and able to purchase your existing home. This doesn’t always happen, and particularly at this time of year, and a bridging loan might be exactly the finance solution needed.
Bridging loans are designed to “bridge” the gap between buying your new dream home purchase and the time needed to “seal the deal” on selling your existing home. If you haven’t got a buyer yet in this seasonal pre-Christmas “shut down” then it may be worth considering securing your new dream home plus giving yourself time to sell your existing home in the normally resurgent market of the new year.
In the past bridging loan have been at higher interest rates and with a higher risk. However lenders have made significant changes to bridging loans and they are great products when matched with the right borrower. The “right” borrower is someone with a good level of equity on their home loan and with a realistic price target for the home they are selling….their only hurdle is the “bad timing” of this time of year in finding a ready and able buyer.
Interest rates from several lenders are at standard variable rates, and the interest charged on the loan for the home you are selling is capitalised, meaning it is added to the balance of the loan. This means there are no repayments on the loan for the house you are selling…and the bridging facility is generally for a six month period. If the six months turns out to not be long enough time to sell there is often an option to extend the arrangement for another six months.
In addition to being at standard variable interest rates, there is no requirement for repayments on the home loan for the house you are selling until you sell the house (the end of the loan term).
Several banks also do bridging loans on your existing home while you build your new home.
Bridging loans…perfect for the right borrower when the “perfect” new dream home comes onto the market.