Tips to make the most of a Bridging Loan

23rd Sep, 2020 | Loan Features

In this article:
A Bridging Loan finances you between the sale of your existing property and the purchase of a new one. Make the most of a bridging loan with these practical tips.

Thanks to all-time low-interest rates, flatlining property prices and motivated sellers, the current property market is undoubtedly a buyer’s one. While things can be simple for buyers who are looking to purchase with a saved deposit and home loan finance, it could be a lot tricky for someone looking for an upgrade after selling an existing home. This is, even more, the case if you are looking to buy first and sell your home later to finance your purchase. Here’s where ‘Bridging Loans’ come into the picture.

What are ‘Bridging Loans?’

Bridging Loans are loans to finance you between the purchase of a new property and sale of your existing one. With a bridging loan, you can get up to 80% of the combined sum of the new property price and the outstanding amount on your current home loan (if you have one). Here’s an example for a clearer understanding. Let’s say the property you would like to buy is priced at $500,000, and the outstanding loan amount on your current residence is $200,000. In such a situation, you would be eligible for a loan of 80% of the combined sum of $700,000 ($500,000 + $200,000) which is $560,000.

Pros of Bridging Loan

There are several benefits of using a bridging loan

  1. Don’t miss a good deal: The most significant benefit of a bridging loan is that if you are financing your new purchase through the sale of your existing home, you can buy this new property before selling your current house. This way, you don’t have to miss out on a good deal.
  2. Possibility of a better selling price: A bridging loan frees you from selling your existing home under pressure. It gives you breathing room to wait for the right price.
  3. Flexibility: Repayments of a bridging loan are typically frozen till you sell your current home. However, borrowers have the freedom to make repayments if they can. So, you can choose to wait it out or start loan repayments.

Find the right loan features for your needs.

Cons of a Bridging Loan

  1. There are costs involved in a bridging loan. These include:
    1. Capitalised interest: The interest on a bridging loan is compounded monthly.
    2. Evaluation Costs: You would need to pay for an evaluation of your existing home and the new property you are looking to purchase.
    3. Application Fees: Lenders charge up to $1000 as application fees.
  2. There is no Lender Mortgage Insurance associated with a Bridging loan. You can get only up to 80% of the combined sum of the new property and the outstanding loan amount of your current home.
  3. A bridging loan usually has a tenure of 6 – 12 months. If you are not able to sell your house within this time, the lender will sell it on your behalf at the best possible price.
  4. There is a risk of wrongly estimating the selling price and time you would need to sell your existing property. If it takes you longer than expected to sell your property, you will incur extra costs in the form of capitalised interest. If your house sells lower than the price you expected for it, you will get stuck with a larger loan balance.

Tips

  1. If you need more than 80% of the combined cost of your new property and existing home outstanding loan amount, you could consider a ‘Deposit Bond’. This is a guarantee from an insurance provider to cover the loan in case of a default. It usually costs 1.2% of the total loan amount.
  2. Opt for a professional evaluation of your current and new property to ensure you have accurate estimates while applying for a Bridging loan.
  3. Select the tenure of your bridging loan wisely. The tenure of a bridging loan could vary from a few days to a full year. Be realistic about the time you would need to sell your property while choosing the tenure.
  4. Seek professional advice. A bridging loan may not be the best way forward for you. There are costs involved in a bridging loan. It is therefore recommended that you go for a bridging loan when you have at least 50% equity in your existing property. Engage a mortgage broker to calculate costs and guide you on the options you have.

 Reach out to us for the best fit as per your circumstances.

Related Articles