Who says you can’t have your cake and eat it too?
Selling your current home for a new one doesn’t always mean that you have to be stuck between rental homes until the sale comes through.
Engaging in bridging finance will let you stay in your current home until it’s sold while snagging a new investment at the same time!
What is bridging finance?
It’s a short-term loan that finances the purchase of your new property, while you’re still selling your existing property. The maximum repayment period is 12 months.
How does bridge financing work?
Bridge financing or a bridging home loan works by taking on your current mortgage, the purchase price of your new property and any purchasing costs until the sale of your existing home which should be within 12 months. The costs covered here will be known as your ‘Peak Debt’.
After your current property is sold, the proceeds will be used to reduce your ‘Peak Debt’. This leaves you with an ‘ongoing balance’ or ‘End Debt’, which is repaid as a standard mortgage loan from there on.
To qualify for the loan, you’ll need to put down a 20% deposit of the ‘Peak Debt’ value or have at least 50% in equity in your current home.
How much does bridging finance cost?
Unfortunately, it doesn’t all come for free. There are a couple of loan fees you may have to pay. But you may be able to reduce your taxes by claiming some of these costs as expenses associated with taking out a loan on your investment property:
- Legal fees: 2% of the loan value
- Valuation fees: $200 to $220
- Loan deposit: 20% of your ‘Peak Debt’ value
- The lender’s fee: 1% to 2% of the loan value.
- Property selling costs: around 3% of the estimated selling price
- Property purchasing costs: around 5% of the property value.
- Interest costs:
Here’s a quick look at some of the variable interest rates according to RateCity. These numbers are based on a loan value of $400,000, with a 30% deposit value and a loan term of 1 year:
Interest Rate (per annum)
Comparative Rate (per annum)
Although these may be slightly higher than your average home loan, the good news is that the repayments are quite flexible (see below). You might be able to get even better loan rates by following these tips!
More and more investors are looking at buying first and selling later because of the investment-tailored benefits. Let’s run you through a few perks of bridging loans:
Benefits of bridging finance
1. Access to fast funding
You don’t want to lose your shot at snagging your dream home while waiting for the sale of your existing property.
According to Home Loan Experts, a bridging home loan or bridging finance lets you file for fast cash anytime, any day.
A quick look around at local banks tells us that the average bridging loan may take around 7 to 14 days to be approved.
The process may be even faster if you’re opting for a closed bridging loan, where you’ve already got an offer on your property.
If you’re looking at an open bridging loan, however, it might take a bit more time to get the approval as the bank may look into your repayment potential.
2. Attractive loan amounts
A bridging loan may let you borrow up to 80% to 90% of your property’s sale price (which is known as your Loan to Value Ratio).
How much you can borrow may depend on how much equity you have in your current property. The lenders may view the risk as higher if you’re not investing any equity into the purchase.
3. Optimising your current home’s sale
We’ve said it before and we’ll say it again - a rushed sale is a dud sale. Why take up a lower offer just because it was the first?
By taking your time to sell and scope out the offers during the bridging loan, you can see where the wind is blowing and get the best deal.
You might even sell your property for higher than your asking price and cut down on your mortgage!
4. Avoid the rental process
Jumping into rentals after decades of being a homeowner may be scary and stressful at the same time. The last thing you’d want to do while juggling house hunts and sale offers is to deal with the whole moving process for just a couple of months.
A bridging home loan helps cut that part out completely. You can continue to live in your own home while focusing on your investment plans.
One of the key benefits of a bridging loan is having all your financials and responsibilities made easier and more convenient for you.
If you’re currently on a fixed rate home loan, you can take out your bridging loan alongside your current loan and keep the repayments separate.
If you’re on a variable rate home loan, you could either choose to keep your bridging loan separate or refinance your current loan into your bridging loan.
The bridging loan also covers all the purchasing costs of buying a new property such as stamp duty.
This means that you don’t have to scramble for money every time a cost comes up. It would simply be covered by the bank and added to your ‘Peak Debt’.
6. Flexible repayments
Unlike standard loans, your repayments during the bridging period may be either reduced or suspended so that they are easier to manage.
If your payments are reduced, you can only pay the interest on your loan until the sale of your old home.
If your payments are suspended, you won’t have to make any repayments while the bridging loan is in effect, but the lender will keep charging you interest and adding it to your loan debt.
After the sale of your old home, you can make the full repayment based on the principal and interest on your ‘End Debt’.
The total amount you have to pay after your old home is sold may be higher if you’re on the suspended repayment plan, when compared to the reduced payment plan.
This is because the monthly interest gets calculated based on your ‘Peak Debt’ and the capitalised interest that has been added.
7. Unlimited lump sum payments
A bridging loan gives you many ways to reduce the financial burden on your wallet when making repayments.
Although you have the choice of repaying none at all during the loan term, you could also choose to make any amount of lump sum payments to reduce your ‘Peak Debt’ before you have to start making the full loan repayments monthly.
8. Interest offset
Certain banks may offer you even more ways to reduce your interest payments. You could put any amount of money in an offset account and link it to your home loan. This amount will be reduced from your balance loan amount on which interest is charged.
For example: if you put $50,000 in your offset account and your loan balance is $200,000, you’ll only have to pay interest on $150,000 of your loan balance.
This lets you save a set amount over time and reduce your loan repayment period. As a reduced interest is charged, you can now repay more of the principal.
9. Investment clarity
Taking out a bridging loan gives you the assurance that you can finance the purchase of a new property and any associated purchasing costs.
This lets you be more confident in your negotiation skills and any other financial decisions you take from there on, to ensure that you’ve got the best deal on the table.
10. A wallet-friendly investment opportunity
Recent research into bridging loan banks tells us that this financing opportunity tries to go as easy on your wallet as possible.
Wherever possible, the same fees and charges may apply as a standard home loan, such as the loan application fee.
A bridging loan also doesn’t charge you any exit fees if you finish off your repayments early.
What are the risks of bridging finance?
Seasoned investors would know that no financial opportunity comes without a few risks - and bridging property finance has its own fair share.
Here’s what you’ll be signing up for:
1. Delayed sale equals more interest
Just like any other home loan, the longer you take to pay it off, the more interest gets accumulated.
You might be enjoying the reduced or lack of repayments during the loan term - but your finances might take a pretty bad turn if you haven’t sold your current home by the loan deadline.
Certain banks may charge higher interest after the deadline. You may also be required to make principal and interest repayments on your ‘Peak Debt’, causing financial stress.
2. No redraw facilities
If you choose to make any repayments during the bridging term but wish to redraw your payments for any reason, you won’t be able to do so.
3. Exit fees if switching lenders
If your current lender doesn’t offer bridging loans, you may have to look for a lender that does. Your bridging loan lender may insist on taking on your current mortgage as well which means you need to switch lenders.
This may cost you early termination fees and break costs if you’re switching during a fixed interest period.
4. Risk of losing your asset
If your loan defaults, you may risk losing your property. What’s worse? You’ll still owe the bank money after this.
5. Higher loan debt
If your house sells for less than the expected price, you will have a higher loan balance than planned.
This can throw your financial plan into a fix and you may have to scramble to make even more loan repayments for even longer.
Is bridging finance a good idea?
According to the Financial Review, soaring housing prices in the property market are turning more homebuyers towards bridging finance.
The certainty, speed and transparency offered by the bridging loan process gives buyers an edge over those who’ve taken out traditional home loans.
Most property sellers also prefer to be paid in cash, turning the odds even more in favour of bridging loan holders.
Recent research tells us that the current housing market has greater housing demand than available stocks.
The competition is fierce. Most property buyers are those who’ve already bought a property but couldn’t market it properly due to the pandemic. Others include buyers who realised they need more living space after the lockdowns.
The Adviser reported that over $100 million in bridging loan applications were lodged within a few months.
It’s recommended that buyers at least exchange contracts on the sale of their current home before entering into a bridging loan. Loan holders may land in hot water if the market prices drop on both homes and interest rates escalate.
Overall, a bridging loan may just be the saving grace you need to steer yourself out of this housing crisis - as long as you’re confident about selling your current home.
Overwhelming housing demand means that you won’t have to worry about this either, but make sure to have an exit route ready.
If you’ve dotted the ‘i’s and crossed the ‘t’s on everything else, sit back and enjoy a wide range of investment benefits, all from the comfort of your home!
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.