Bridging finance has been around for many years, and some lenders have different names for this type of mortgage. Some call it a ‘go-between loan’, while ‘relocation loan’ is another label bandied about by other lenders.
Whatever you wish to call this loan category, bridging finance is simply a loan designed to get people from one property to the next. Craig Betalli from Our Broker explains, “If you are living in one property and want to buy another, then bridging finance can help make this happen. It is a type of loan that a lender will extend to you on the basis that you plan to sell the first property and pay down your loan.”
Bridging loans often bring up a certain amount of anxiety for people because, in days gone by, they made up the shortfall between what people had in savings and the deposit required to make a property purchase. In this instance, bridging finance was used as a personal loan to make up the deposit shortfall.
Today a bridging loan typically involves a bank lending buyers’ money on top of their existing loan. For this reason, a bridging loan often comes with a higher interest rate. But the banks factor in these interest costs for a period, so you don’t have unmanageable repayments to cover during the bridging period.
For example, let’s assume you’re upgrading to a property worth $1.5 million, so the lender will give you bridging finance for the $2.0 million to cover the value of the new home plus the $500,000 mortgage you still owe on the $1.0 million property you’re selling.
This means that you will have a $2.0 million mortgage, and a finance specialist such as OurBroker will calculate the interest difference on the two loans. With this calculation finalised, the bank will lend you the extra money to cover additional interest repayments for 6-12 months, which will give you time to sell your property.
Craig recommends that those considering buying the next home before selling an existing property negotiate a longer settlement time to avoid using bridging finance. A longer settlement time allows buyers more time to sell a current property, removing the need for a bridging loan.
That said, if you can’t find a buyer for your current property quickly, then bridging finance will prove valuable. It’s also worth noting that a lender will only require you to make a mortgage repayment equivalent to what you’d pay had you’d been able to sell and settle on the previous home. Using the example above, you might effectively have a loan for $2.0 million and only be paying repayments on $1.0 million.
How you use bridging finance depends on the market conditions. “In a rising property market, we’re encouraging people to go out and buy first and then look to sell their existing home,” Craig said. “This way, you lock in a price on your next home, making sure you have a property that suits your needs.
“You can then sell your existing property in a stronger market at a potentially higher price.” On the flip side, it’s usually best to sell first then buy in a falling market.
“Regardless of the market conditions, we can guide buyers and sellers on the best approach for their situation, making the whole process much less stressful.”
To find more about bridging finance, contact your Our Broker today on 1800 913 677.