What Are Bridging Loans and When Do You Need Emergency Property Purchase Funding?
Bridging Finance serves as a short-term solution when you need to buy a home before selling your existing property. These loans help bridge the gap between purchasing your new home and receiving proceeds from the sale of your current property. For South Australian property buyers, understanding when and how to access Bridging Loan options from banks and lenders across Australia can make the difference between securing your dream home or missing out entirely.
Emergency property purchase funding typically becomes necessary when:
• You find your ideal home but haven't sold your current property
• Settlement dates don't align between your purchase and sale
• You need to secure a property quickly in a fast-moving local property market
• You're building a new home whilst still living in your current property
How Bridging Loans Work: Understanding Peak Debt and End Debt
Bridging loans operate differently from traditional mortgages. The loan amount is calculated using two key figures:
Peak Debt represents the maximum amount you'll owe when you own both properties. This includes your new home loan plus any remaining debt on your existing property.
End Debt is what remains after selling your existing property and paying down the bridging facility. This typically becomes your ongoing home loan or investment loan depending on your circumstances.
Should You Buy or Sell First? The Pros and Cons
Advantages of Buying First with Bridging Finance:
• Secure your new property without timing pressure
• Avoid temporary accommodation costs
• Move at your own pace without rushing the sale
• Potential to negotiate better prices on both transactions
• No risk of being homeless between settlements
Disadvantages to Consider:
• Higher interest rate compared to standard home loans
• Additional fees including lenders mortgage insurance (LMI) if applicable
• Carrying costs for two properties
• Pressure to sell your existing property within the loan term usually 6 to 12 months
• Higher stamp duty costs upfront
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Bridging Loan Interest Rates and Repayment Options
Bridging Loan Rates are typically higher than standard home loan rates, reflecting the short-term nature and increased risk. Most lenders offer:
Variable Interest Rate Options:
Most bridging facilities use variable loan rates, which can fluctuate during your loan term. Interest rate discounts may be available depending on your loan to value ratio (LVR) and overall financial situation.
Interest Capitalisation:
Many borrowers choose to capitalise interest payments, meaning interest accumulates and is added to the loan balance. This reduces immediate cash flow pressure but increases the total amount owing.
Principal and Interest Payments:
Some borrowers prefer making regular repayments, particularly if they have strong cash flow or want to minimise the debt accumulation.
The Application Process: Getting Pre-Approved for Bridging Finance
Applying for a Bridging Loan requires careful preparation. The streamlined application process typically involves:
- Loan pre-approval based on your borrowing capacity
- Providing bank statements and income documentation
- Property valuations for both existing and new properties
- Contract details showing the purchase price of the new home
- Evidence of your marketing strategy for the existing property
Getting loan pre-approval strengthens your position when negotiating, particularly in competitive markets. This shows sellers you have confirmed funding available.
Calculating Your Borrowing Capacity and LVR Requirements
Lenders assess your borrowing capacity based on your ability to service both loans simultaneously. Key factors include:
• Combined value of both properties
• Your income and existing debts
• Exit strategy for selling your current home
• Loan to value ratio across both properties
Most lenders require a maximum LVR of 80% across both properties to avoid lenders mortgage insurance (LMI). However, some specialist bridging finance providers may accept higher LVRs with additional premium pricing.
Bridging Loan Terms and Settlement Considerations
Typical loan terms are:
• 6 to 12 months for standard property sales
• 12 months if your new property is being built
• Some lenders offer extensions, though usually with higher rates
The contract purchase price of the new home, combined with your existing mortgage balance, determines your peak debt position. This affects both approval and pricing.
Additional Features: Offset Accounts and Flexibility
Many bridging loans offer offset account facilities, allowing you to reduce interest charges by parking funds against the loan balance. This can be particularly valuable if you receive a deposit from your property sale before final settlement.
Making the Right Choice for Your South Australian Property Journey
Bridging loans provide valuable flexibility for South Australian property buyers, but they're not suitable for everyone. Consider your financial situation, timeline pressures, and ability to service higher costs when making this decision.
For South Australian buyers, particularly in areas like Adelaide's growth corridors, timing can be crucial. A well-structured bridging facility might be the difference between securing your ideal home or continuing your search.
Success with bridging finance depends on realistic timelines, strong financial buffers, and a clear exit strategy for selling your existing property.
Call one of our team or book an appointment at a time that works for you to discuss whether bridging finance suits your property goals.
