What is a Bridging Loan?
So, you’ve finally found the house of your dreams – the one where you can see yourself raising a family and hosting elaborate dinner parties.
However, there’s one ‘small’ problem with your property acquisition requirements – you haven’t sold the house you’re living in.
Before you give up on your hopes of getting your new home, talk to your broker about a bridging loan.
What is a bridging loan? Read on to find out!
How does a bridging loan work?
A bridging loan is a short-term financing solution designed to cover the purchase price of a second property.
It’s intended to give the seller time to sell their existing property and creates a financial ‘bridge’ for homeowners to close the gap between buying and selling.
From the time of loan approval, the consumer has 6-12 months to sell their home before the bridging loan is redacted.
Having this bridging loan means that homeowners don’t need to go through the trouble of moving twice – which is both costly and inconvenient.
How much can I borrow on a bridging loan?
How much you can borrow on a bridging loan and the bridging loan requirements will vary significantly from lender to lender.
The two key variables that mainly influence your borrowing power with a bridging loan is the lender’s requirements to evidence the borrower’s serviceability on peak debt or end debt.
Secondly, if the lender loads the interest rate due to being a specialty product, this will increase the assessment rate.
Some lenders may let you borrow up to 100 per cent LVR (loan value ratio).
However, this will depend on the lender, along with other factors.
When looking at a bridging loan, it’s best to speak with a mortgage broker to accurately determine how much you can borrow, as they can assess your circumstances based on specific lender’s requirements.
How long does it take to approve?
Again, this will vary based on your lender. On average, a bridging loan takes around five days to be approved – this may be less (or more) in some instances.
For a more accurate estimate of how long your bridging loan will take to approve, chat with your Inovayt mortgage broker.
What are some of the other benefits of a bridging loan?
There are plenty of benefits available for homeowners who opt for a bridging loan. The main one is that they help you buy your new property straight away without waiting for your existing home to sell. Provided the timing works, this also means the buyer can avoid needing to find temporary accommodation (which can be highly stressful and can be costly).
In terms of repayments, you may only need to make repayments on your current mortgage during your bridging period, depending on how your loan is structured.
What are the risks of a bridging loan?
With a bridging loan, there are certain risks to consider. Your mortgage broker can discuss these risks with you to help you decide.
The risks involved include the following:
Interest is compounded monthly
Your interest will be capitalised on top of your peak debt, meaning that the longer it takes to sell your property, the more interest your loan will generate. This interest is compounded monthly, making a bridging loan a potentially expensive finance option.
With a bridging loan, you’ll need to pay for two property valuations – your existing property and your new property.
One key risk with valuations is that if the buy and sell transaction is based on the sale property being worth $500k – for example – and it’s valued at $450k, this will negatively impact LVR and potentially jeopardise the deal.
It’s best to speak to your broker in these instances.
Check out Inovayt’s free property report valuation tool.
What happens if you don’t sell your property in time?
Taking out a bridging loan but not being able to sell your house in time can be extremely stressful.
Typically, in a bridging loan contract, the borrower will be required to repay a certain amount of the loan back at the end of the bridging period.
If you’re not sure on how this may affect you, chat to your broker.
No redraw facility
Most of the time, you can make extra repayments during the bridging loan period.
However, do so with caution – there is no redraw facility, which means you won’t be able to withdraw any extra funds (if you need to).
Standard early termination fees will apply if switching lenders
Not all lenders offer bridging loans. If your current lender doesn’t provide this option, you’ll need to switch to one that does.
This lender must be willing to take on your entire debt (existing loan plus bridging loan).
If you’re switching lenders, you may be liable for early termination fees – especially if you change during a fixed interest period.
Are all bridging loans the same?
Although the aim and outcome of bridging loans are the same, the actual structure and bridging loan requirements vary between lenders.
This means that not all of them are the same.
Peak debt vs end debt servicing
Peak debt refers to the total debt borrowed by the consumer.
It includes the balance of the loan on your existing home, the contract purchase price of the new house and any purchase costs (e.g., stamp duty, LMI, etc.).
End debt refers to the money you still owe once you’ve sold your property and used that money to pay off the peak debt.
This end debt will then turn into your regular mortgage for your new property.
The terms for your bridging loan will (again) vary based on which lender you work with.
The loan term is generally 6-12 months, with interest rates fluctuating between lenders.
Interest repayments vs interest capitalisation
The interest rates bridging loan borrowers can expect to face are significantly higher than regular mortgage interest rates.
This means that your repayments will be higher than your standard mortgage repayments.
Generally, bridging loans are interest-only loans.
When it comes to bridging loans, the interest capitalisation feature is an adequate solution for those needing some financial breathing room.
If your servicing capacity isn’t quite enough to cover the repayments on both properties, a bridging loan with an interest capitalisation feature will ease this pressure while you wait for your property to sell.
Principal repayments vs no principal repayments
There are two types of payments borrowers can make on their bridging loan.
Principal repayments allow the borrower to make unlimited repayments on their bridging loan until they sell their property.
This can reduce interest paid for the span of the loan.
No principal repayments
On the other end of the scale, no principal repayments mean the borrower doesn’t pay anything until their current property sells.
How can Inovayt help with a bridging loan?
Inovayt has a team of skilled mortgage brokers with experience helping clients with bridging loans.
Our team takes the time to understand your situation and whether a bridging loan is the best option for you.
If so, we’re with you through every step of the process and throughout the entirety of your loan.
Are you considering a bridging loan for your next property? Get in touch with the Inovayt team today.