Bridging Finance Explained - What is it and How does it Work?
There it is! Your dream house and your perfect next property. You are aware that opportunities like this neither just lie around nor comes that often. And while you have your eyes on the property so does everyone else.
The issue here is you haven’t sold your old property yet because of which you might lose your chance to own your perfect home. This is a common issue that often rises while upgrading your property. Even then you have your options and you can still secure your dream house.
Under such circumstances, you can always opt to bridge loans. Here is how bridging finance works.
What is a bridging loan?
Basically, bridging loan allows you to secure the gap between buying your new property and selling your existing one. This enables you to secure the mortgage for the new property while you take your time in selling your old one. You will have access to the funds either at the standard interest rate without any discounts or sometimes at a higher interest rate.
Bridging loans are of two types:
- Closed bridging loan : is applicable if you already have closed the deal on your current property and know the dates on which your property will be sold along with the funds to be received.
- Open bridging loan : is applicable if your existing home hasn’t been sold yet. This type of loan can be arranged for maximum of 12 months.
Bridging Loan Requirements
Often, not all lenders offer bridging loans. Among the ones that offer, they usually have strict criteria for you to qualify in order to acquire the bridging finance. Here are few bridging loan requirements in order for you to qualify:
- You will have to meet all the requirements of standard serviceability.
- You will need the evidence of your employment status, your current income, expenses along with other documents supporting your application.
- You should have enough income to show servicing capacity for the end debt.
- Very good credit history . Unfortunately, bad credit history can’t get you a bridging loan.
- The funding shall be used in such a way that overall loan to value ratio shall not exceed 80% at any time.
- Bridging the term for 6 months for buying an existing property and 12 months for buying a new property
When it comes to deposit, you do not need to have a cash deposit but might require an equity of at least 20% of the peak debt. Peak debt is the purchase price of your current home loan topped with the purchase price of the new property.
If you are borrowing 80% of the total security value, you will need to pay Lender Mortgage Insurance. Along with it, you will need a 5-10% deposit in your savings. If you do not have the deposit, you can apply for deposit bond once you have your loan approved. Deposit bond is a guarantee to the vendor on completing your purchase given by the insurance company.
Benefits of Bridging Finance
Bridging finance for upgrading comes with benefits as it prevents you from going through the stress of selling your current home, arranging a temporary accommodation and then finding a new property.
- With bridging finance, you can purchase your new property right away without having to wait for loan approval.
- You can proceed for the purchase with confidence without having to compromise on selling your current property.
- Bridging finance gives you enough time to price your property better and avoid the stress of selling the property in rush.
- You can avoid the hassle of renting a temporary property, moving there, and then moving out after purchasing a new home.
- Previously, lenders charged higher interest rates for bridging loan. But in today’s time, there are lenders who charge standard variable interest rates. It all depends on finding the right lenders.
- You can make the bridging loan payments even during the bridging period in turn decreasing your interest cost.
Drawbacks of Bridging Finance
The bridging loan process comes with its drawbacks.
- While bridging loan makes the purchase of new property easy, you will end up paying interest on interest if you do not make any payments on the bridging loan.
- There is no redraw facility which is why if you choose to repay during the bridging term and need to redraw for whatever reason, you will have no access to it.
- Time is crucial in selling your existing property. If you do not sell the property in time, you will be charged with a higher interest rate leading to a financial stress.
- Proper valuation of your existing home is crucial. You’ll need to have a good idea of how much your current home will be sold for and arrange the budget for new loan payments accordingly.
- You will also be paying for two valuations - both your new property and your current one.
Tips to Keep in Mind While Choosing Bridging Loan
With both its pros and cons, choosing a bridging loan is a tough decision to make. Here are few tips you can keep in mind while understanding if bridging loan is right for you:
- Be realistic of the valuation of your existing property. Get a proper valuation to avoid financial complications that might occur later.
- Also, be realistic about time it might take to sell your current property. Know how much it might take to reach the settlement depending on the area you live in and the property market there.
- Having at least 50% equity in your existing property sets you in the right track.
- In order to minimize the interest and overall peak debt, we recommend you to make some repayments during the bridging period.
While bridging loan is a great option, it is not a debt to be taken lightly or rushed into. Talk to experience mortgage brokers for professional suggestions and right track for you depending on your circumstances. Book an appointment now.