What is a Bridging Loan?
Many house buyers experience an awful situation where their dream home is discovered but their current property is not sold yet. Or maybe it is on the market but a worthy buyer is not found yet.
This would mean a lower price for selling their current house quickly in order to shorten the time between two settlement dates which is again a stressful scenario.
Whilst everyone sees very little options in this situation, availing a bridging loan can allow the property purchasers to act positively and confidently, purchasing their dream home before the current one is sold and in most cases capitalising on the situation.
A short–term bridging loan allows home buyers to buy or upgrade properties easily. They don’t need to coordinate settlement dates or find interim housing and will be ready to buy from the moment you enter the highly competitive property market.
How does Bridging Finance work?
A bridging loan or bridging finance is whilst you borrow the funds required to settle the assets being bought you keep the existing mortgage for your present day home.
Mortgages are held by the same lender over both estates. The lender then permits interest to accrue at the bridging portion of the mortgage for up to 6 months giving the borrower time to sell their first property.
The total amount borrowed plus an allowance for interest is referred to as the ‘Peak Debt’ and after selling the first property, the net proceeds are used to reduce the overall mortgage amount. The closing debt is referred to as the ‘End Debt’ and is then transformed into an ordinary loan product.
Lenders work things out pretty differently. However, the traditional rule that the borrower only has to be able to prove that they can service the End Debt not the Peak Debt.
You will typically have the possibility to make repayments on the existing loan or proposed End Loan even as the bridging component has the interest capitalised onto the mortgage until the present asset is sold.
Who Needs Bridging Loans?
Mostly, bridging loans are required by landlords and amateur property developers, including bidders purchasing a lucrative property deal at an auction where a loan is needed quickly. They may also be offered to fat borrowers who want effortless lending on residential and commercial properties up-gradation and developments.
Policy for Lending Assessment
When assessing the money, the lenders will look at the equity in your current home. The maximum Loan: Valuation Ratio is generally 80% to 90% depending on the moneylender.
Most of the lenders offering commercial and residential short-term bridging finance dispense the maximum amount on the condition that there is an End Debt.
However, in cases where there will not be an End Debt such as when you are moving into a less costly house, the fees associated with your loan will generally be greater.
Moneylenders may require proof of selling the current property as a pre-requisite for loan approval. It can be a copy of the sale contract.
Risks in Bridging Loan
Rates on bridging loans are now quite similar to any standard home loans provided by any private or government lender but interest will be accruing during the time it takes to sell your current home. Do not over estimate the selling price of your current property and get a property report or get its accurate valuation through any property evaluator agencies.
The earlier you sell your property the better it is for your pocket – don’t delay – be decisive and think with your brain and not emotionally.
Benefits of Bridging Finance
Bridging finance can be ideally suited to the builders, developers, investors and individual buyers to act instantly after locating the desired property and can capitalise on the opportunity.
Buying a lucrative property deal before selling the existing home can become easy by availing a bridging loan from various financial institutions available in the property market. Also, a bridging loan helps you to move home in an ideal manner; you will always have a home and you don’t have to coordinate settlement dates.
Move into your new property first and sell your first one later.
Read more: 9 Tips for buying a property at auction
Why do you Need a Broker?
Every lender has a different policy and ways of assessing bridging loans and it is quite diverse. Some lenders require the loan acquirer to be able to service the peak debts interest while others don’t offer bridging loans at all without looking at the entire peak debt.
A genuine and reliable broker is one who offers bridging loans only by seeing the end debt.
The thumb rule suggests that you will need at least 50% equity in your existing home before applying for a bridging loan for your property upgrade.
A broker will also assist in gauging the best option according to your circumstance.