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The funds from bridging finance, or a bridging loan, can be used to temporarily fund a property purchase. When you sell your existing home, you use the funds to pay off the bridging loan.
It means that, if you fall in love with a new property, but you still own your own house or are repaying a mortgage, you may be able to put in a winning offer without having to wait to sell your current home.
The period between buying your new property and selling your existing property is called the bridging period, and lenders can provide financing to help you secure the new property, otherwise known as bridging finance.
The funds from selling your existing property will then help pay off the bridging loan.
Some lenders may also provide bridging finance to fund building a new residence, while you are still living in your current home.
The amount you can borrow on a bridging loan is determined by the amount of equity that you have in your current property.
Generally, the bridging term will be available for between six months to a year.
Some lenders will consider approving a bridging loan if you are building a property, but there will be conditions. For example, if construction is completed within an agreed time like 6 months, after the loan is funded.
The lender will calculate the mortgage outstanding on your existing home and add that to the purchase price of your new property. This gives a figure called the ‘Peak Debt’.
As the name suggests ‘Peak Debt’ is the highest amount of debt that you will be in during the bridging period, and this is used to determine how much you can borrow.
This varies between lenders but is generally about 80% of your peak debt. It is possible to borrow more than this at times, but the qualification criteria will be harder and you may have to pay Lenders Mortgage Insurance.
Importantly, lenders will often discount the projected sale price of your current home by around 15%. This is called a ‘Fire Sale’ Buffer and can affect how much you can borrow. So, it’s worth bearing in mind when considering bridging finance.
There are some possible downsides to taking out a bridging loan, but by planning carefully and being able to sell in time and make your repayments, most of them can be avoided. Here are some to bear in mind.
Bridging finance generally comes at the same sort of fees and interest that you’d expect from a normal loan, though this does vary between lenders and according to your personal circumstances.
As mentioned earlier, you will probably have to pay for two property valuations, but that is a one-off cost.
There are a few measures you can take which should help you avoid the pitfalls which could incur extra expense and lead to financial stress. Here are some things to consider:
If you can comfortably afford to pay both loans while you wait to sell your current home, then you probably don’t have to worry about taking on a bridging loan. Especially as, in some circumstances, a bridging loan may come at a higher interest rate than your existing loan.
As well as the usual evidence of income and ability to repay the loan, you will need to secure your bridging loan with property, in the same way that your home loan is secured with property.
So, if you think bridging finance could be right for you, maybe it’s time to start looking around and comparing from a range of lenders and rates. For more information, you can talk to one of Lendi’s home loan specialists 1300 186 260 (08:30-18:30).
Last updated: 15/03/2022