When you find the perfect home but haven't sold your current property yet, timing becomes critical. Should you buy or sell first? This common dilemma faces many Australian homeowners, and bridging finance offers a solution to bridge the gap between purchasing and selling.
Understanding Bridging Loans
Bridging loans are short-term loans designed specifically for property transactions where timing doesn't align perfectly. These financial products allow you to purchase a new home while still owning your existing property, providing the flexibility to secure your next home without waiting for settlement on your current one.
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. This timeframe provides adequate opportunity to market and sell your current home without the pressure of immediate settlement.
How Bridging Finance Works
Bridging loans operate on two key debt levels:
• Peak Debt: The maximum amount borrowed, including the contract purchase price of the new home plus your existing mortgage balance
• End Debt: The remaining loan balance after selling your current property and applying the proceeds to reduce the bridging loan amount
For example, if you're buying a $800,000 home while owing $400,000 on your current property valued at $600,000, your peak debt would be $1.2 million. Once you sell for $600,000, your end debt reduces to $600,000.
Interest Capitalisation and Repayment Options
Most bridging loans offer interest capitalisation, meaning you don't make monthly repayments during the bridging period. Instead, interest accumulates and is added to the loan balance. This arrangement helps manage cash flow during the transition period.
When calculating bridging loan repayments, lenders consider both variable interest rates and fixed interest rate options. Variable loan rates tend to be more common for bridging finance, though some lenders offer fixed interest rate loan products.
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Key Factors Affecting Your Bridging Loan Application
Loan to Value Ratio (LVR)
Lenders assess your borrowing capacity based on the combined value of both properties. Most require an LVR of 80% or less to avoid lenders mortgage insurance (LMI), though some specialist lenders may accept higher ratios.
Financial Situation Assessment
The application process involves comprehensive evaluation of your financial situation, including:
• Current income and employment stability
• Bank statements showing savings and spending patterns
• Existing debt obligations
• Property valuations for both homes
Interest Rate Considerations
Bridging loan rates typically sit above standard home loan interest rates due to their short-term nature and higher risk profile. However, many lenders offer interest rate discounts for clients with strong financial profiles or existing banking relationships.
The Application Process
Applying for a bridging loan involves a streamlined application process compared to traditional home loans, given the time-sensitive nature of property purchases. Essential documentation includes:
• Loan application forms
• Financial statements and bank statements
• Property contracts and valuations
• Evidence of marketing strategy for your existing home
Getting Pre-Approved
Loan pre-approval provides confidence when making offers on new properties. This process establishes your borrowing capacity and demonstrates to vendors that you're a serious buyer with confirmed financing.
Accessing Bridging Loan Options
Simple Lending can access bridging loan options from banks and lenders across Australia, ensuring you receive suitable terms for your situation. Different lenders offer varying:
• Maximum loan amounts
• Interest rate structures
• Loan term flexibility
• Offset account facilities
• Serviceability requirements
Investment Property Considerations
If your current property will become an investment loan rather than being sold, bridging finance can facilitate this transition while you establish your new home loan. This strategy requires careful consideration of ongoing serviceability for multiple properties.
Local Property Market Factors
Understanding your local property market conditions influences bridging loan strategy. In slower markets, longer loan terms may be necessary, while active markets might allow shorter bridging periods.
Making the Right Choice
Bridging loans suit buyers who have found their ideal property but need time to sell their current home without losing the purchase opportunity. This financing solution provides flexibility in competitive property markets where timing is crucial.
Whether you're upgrading, downsizing, or relocating, bridging finance can provide the financial bridge needed to secure your new home while managing the sale of your existing property at your own pace.
Call one of our team or book an appointment at a time that works for you to discuss your bridging loan options and determine if this solution aligns with your property goals.
