February 26, 2014
Bridging finance can be ideally suited to the real estate market we are currently experiencing – in a strong competitive situation if you can act quickly and confidently once you locate a property you can often capitalise on the opportunity. Locating a property you are keen to buy before you sell your current home is not going to hold you back if you utilise a bridging loan. Also a bridging loan enables you to move home in a logical manner – you won’t be homeless and you won’t have to co-ordinate settlement dates. Buy, move in, and sell – less stress for everyone.
Why Use a Broker for a Bridging Loan
The world of bridging finance has changed significantly in the past several years. Rates have changed and the ways that different lenders assess your application are numerous. Some of these take into account your Peak Debt and End Debt in vastly different ways – a broker will place your application with the lender that is tailor-made to your particular situation. Here at Mortgage Choice in Surry Hills we have been helping with bridging loans for over 10 years so we have lots of experience and are up to speed with how it’s done. Many of our original customers have bought and sold 2-3 times so we have an in-depth body of knowledge about bridging finance.
A bridging loan is a short term loan that finances the purchase of a new property while you are selling your existing property. This type of loan can also provide finance to build a new home while you live in your current home. You will normally have 6 months to sell the existing property or 12 months if a new property is being constructed.
How does a bridging loan work?
When you take out a bridging loan the lender usually takes over the mortgage on your existing properly as well as financing the purchase of the new property. The total amount borrowed is called the Peak Debt, and includes the balance of the loan on your existing home, the contract purchase price of the new home and any purchase costs such as stamp duty, legal fees and lenders fees.
The minimum repayments on a bridging loan will generally be calculated on an interest-only basis, however in many cases this interest may be capitalised until the existing home is sold, i.e. accrued and added to the Peak Debt.
Once you sell your first property, the net proceeds of the sale (sale price minus any sale costs such as selling agent's fees) are used to reduce the Peak Debt. The remaining debt plus any capitalised interest becomes the End Debt. This End Debt is then paid as per a regular mortgage product.
An example bridging loan scenario
If the balance- of the loan on your existing property is $200,000 and the purchase costs of the new properly are S500,000, you may be able to borrow up to S700,000, which will be your Peak Debt. You now have a short term debt of S700,000 while the sale of the 'existing property is completed. Interest will be paid on $700,000, as opposed to the original $200,000 loan.
lf the net proceeds of the sale of the existing properly are S400,000, the borrower will be left with an End Debt of $300,000 (that is $700,000 less $400,000) plus any capitalised interest.
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. Your Peak Debt will therefore be increasing each month as the interest is added to your loan. Your monthly interest will also be calculated on your Peak Debt including the capitalised interest.
Wherever possible, making some repayments is recommended to stop the total amount of the loan ballooning and limit the amount of additional interest being charged.
Lending Assessment Policy
When assessing the funds they will allow you to borrow, lenders will look at the equity in your existing home. The maximum Loan to Valuation Ratio is generally 80%-90% depending on the lender.
Most lenders offering bridging finance do so on the condition that there is an End Debt. However, in cases where there will not be an End Debt such as when you are downsizing your home, the fees associated with your loan will generally he higher. Some lenders may require evidence that your existing property has actually been sold (i.e. a copy of the sale contract) as a pre-requisite for approval.
If bridging finance is required, usually the current lender is in the best position to assist. However if the existing lender does not offer bridging loans, a new lender will need to be used. The new lender will take on the existing loan, which means paying out the existing lender. If this happens to be a fixed rate loan, early termination may result in break costs being payable by the borrower for early termination of the loan.
As an alternative to bridging finance you might investigate whether your current loan is “portable”. This feature allows you to take an existing loan to a different property when you move. You may be able to move fixed rate loans avoiding break costs.
Interest rates on bridging loan are now similar to standard home loans but interest will be accruing during the time it takes to sell your current home – consider carefully the affordability of this. Also be careful not to overestimate the selling price of your current home – we all tend to do this a bit – get a property report and a number of estimates. Remember you have a specified period in which to sell your property – don’t delay - be decisive and think with your head not your heart.