When you're looking to expand your property portfolio, timing can be everything in the Queensland property market. Sometimes the perfect investment opportunity comes along before you've sold your existing property. This is where bridging finance becomes a valuable tool for property investors.
What is Bridging Finance?
Bridging finance is a short-term loan that helps bridge the gap between buying a new investment property and selling an existing one. These loans typically run for 6 to 12 months, giving you enough time to sell your current property while securing your new investment.
The loan term usually extends to 6 to 12 months to sell existing property, though it can extend to 12 months if new property is being built. This flexibility allows investors to move quickly when opportunities arise in the local property market.
How Bridging Loans Work for Investment Properties
When you're buying a home or investment property with bridging finance, lenders calculate two key figures:
• Peak Debt: This is your maximum borrowing during the bridging period, calculated by adding your new loan amount to your existing home loan balance
• End Debt: This represents your loan balance after selling your existing property and paying down the peak debt
The contract purchase price of the new home, combined with your existing loan balance, determines your peak debt position. Lenders assess your borrowing capacity based on your ability to service this peak debt amount.
Interest Rate Options and Calculations
Bridging loan rates typically come in two forms:
- Variable interest rate: Fluctuates with market conditions
- Fixed interest rate: Locked in for the loan term
Most bridging loans feature interest capitalisation, meaning the interest is added to your loan balance rather than requiring monthly payments. This reduces the immediate financial pressure while you're managing both properties.
When calculating bridging loan repayments, lenders consider your loan interest rate, the loan amount, and whether you're making interest-only payments or capitalising the interest.
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The Application Process
Applying for a bridging loan involves a streamlined application process designed to move quickly. You'll need to provide:
• Bank statements demonstrating your financial position
• Evidence of your existing property's market value
• Contract of sale for your new investment property
• Proof of income and employment
• Details of your current debts and assets
The loan application process typically moves faster than traditional home loans, as lenders understand the time-sensitive nature of property transactions.
Understanding LVR and LMI Requirements
Your loan to value ratio (LVR) plays a crucial role in bridging finance approval. Lenders calculate this based on your peak debt against the combined value of both properties.
If your LVR exceeds 80%, you may need to pay lenders mortgage insurance (LMI). However, some lenders offer interest rate discounts or reduced LMI for investment properties, particularly for experienced investors with strong financial positions.
Access to Bridging Loan Options
You can access bridging loan options from banks and lenders across Australia, each offering different terms and conditions. Some key features to compare include:
• Interest rate structures
• Loan terms and flexibility
• LVR requirements
• Fee structures
• Offset account availability
• Whether the loan converts to a standard investment loan after settlement
Should You Buy or Sell First?
This common dilemma faces many property investors. Bridging finance removes the pressure of this decision by allowing you to:
• Secure desirable investment properties without delay
• Avoid temporary rental arrangements
• Maintain your investment timeline
• Reduce the risk of missing out on opportunities
Getting Pre-Approved
Considering getting loan pre-approval for bridging finance can strengthen your position when making offers. Loan pre-approval demonstrates to vendors that you have the financial capacity to complete the purchase, even without selling your existing property first.
Financial Considerations
Before committing to bridging finance, carefully assess your financial situation:
• Can you service the peak debt if your property doesn't sell immediately?
• Do you have sufficient equity in your existing property?
• Are you comfortable with the variable loan rates or fixed interest rate loan terms?
• Have you factored in stamp duty and other transaction costs?
Working with Mortgage Brokers
A qualified mortgage broker can help you access bridging loan options from multiple lenders, ensuring you find the most suitable terms for your investment strategy. They can also assist with the application process and provide guidance on structuring your finance for optimal tax outcomes.
Bridging finance offers Queensland property investors the flexibility to act quickly in a dynamic market. While these short-term loans carry higher interest rates than traditional home loans, they provide the opportunity to secure valuable investment properties without the constraints of traditional sale-and-purchase timing.
Call one of our team or book an appointment at a time that works for you to discuss your bridging finance options and find the right solution for your investment property goals.
