Bridge the gap to purchase your investment property

Understanding Bridging Finance for Investment Properties

Bridging finance offers property investors a strategic solution when timing doesn't align between buying and selling properties. This short-term financing option allows you to bridge the gap between purchasing your new investment property and selling your existing one, providing flexibility in the local property market.

A bridging loan is essentially a temporary financing solution that enables you to access funds for your new property purchase while you still own your current property. The loan term usually ranges from 6 to 12 months to sell your existing property, though this can extend to 12 months if your new property is being built.

Should You Buy or Sell First?

This question frequently challenges property investors. Selling first provides certainty around your financial situation and eliminates the need for bridging finance, but you might miss out on the perfect investment opportunity. Buying first with bridging finance allows you to secure your desired property without the pressure of rushed sales, though it does involve additional costs.

Factors to consider include:

• Current market conditions in your area
• Your borrowing capacity and financial buffer
• The desirability and likely sale timeframe of your existing property
• Interest rate implications of holding two properties temporarily

How Bridging Loans Work

Bridging finance operates on what's called "Peak Debt" and "End Debt" principles. Peak Debt represents the maximum amount you'll owe when you own both properties simultaneously. This includes your existing home loan balance plus the bridging loan amount for your new investment property.

End Debt is the amount remaining after you sell your existing property and pay down the bridging loan. Most lenders will assess your application based on both these figures to ensure you can service the peak debt temporarily and afford the end debt long-term.

Calculating Bridging Loan Amounts and Repayments

The bridging loan amount typically covers the contract purchase price of the new home, plus associated costs like stamp duty and legal fees. Lenders generally allow you to borrow up to 80% of the new property's value without requiring lenders mortgage insurance (LMI), though higher loan to value ratios are possible with LMI.

Bridging loan rates are typically higher than standard home loan or investment loan rates, reflecting the short-term nature and additional risk. Most bridging loans feature:

• Variable interest rates rather than fixed interest rate options
• Interest capitalisation, meaning you don't make monthly repayments
• The ability to use an offset account to reduce interest charges

The Application Process

Applying for a bridging loan requires thorough preparation. Lenders need to assess your ability to service both loans simultaneously and your capacity to sell your existing property within the agreed timeframe. You'll need to provide:

• Bank statements showing your financial position
• Property valuations for both properties
• Evidence of your existing property being marketed for sale
• Details of your income and employment
• A realistic timeline for selling your current property

The streamlined application process with experienced mortgage brokers can help you access bridging loan options from banks and lenders across Australia, ensuring you find suitable terms for your situation.

Interest Rate Considerations

Bridging loan rates vary between lenders, and some offer interest rate discounts for customers with strong credit histories or existing banking relationships. While you can't typically get pre-approved for specific interest rates due to the variable nature of these loans, getting loan pre-approval for the loan amount helps establish your borrowing capacity.

Some lenders offer the flexibility to split your bridging facility, allowing portions on variable loan rates while others might offer short-term fixed interest rate loans, though this is less common in the bridging loan market.

Maximising Your Bridging Finance Strategy

To make the most of bridging finance for your investment property purchase:

1. Prepare your existing property for sale before applying for bridging finance
2. Research the local property market to set realistic sale expectations
3. Consider professional property management for your current property if it becomes a rental
4. Maintain a financial buffer to cover the higher interest costs during the bridging period
5. Work with experienced mortgage brokers who can guide you through the complexities

Bridging finance provides valuable flexibility for property investors, but it requires careful planning and realistic expectations about sale timelines and costs. When used strategically, it can help you secure prime investment opportunities without being constrained by the timing of your existing property sale.

Whether you're expanding your investment portfolio or making your first investment property purchase, understanding bridging loan options can provide the financial flexibility needed to capitalise on market opportunities. Call one of our team or book an appointment at a time that works for you to discuss your bridging finance needs and explore the best options for your investment goals.