How does a bridging loan work?
When you take out a bridging loan, the lender takes a mortgage on your existing property as well as your new property.
The total loan amount is called the Peak Debt, and is basically;
- the loan on your existing home PLUS
- the contract purchase price of the new home and any purchase costs such as stamp duty.
The repayments on a bridging loan will generally be split in two;
- Peak debt – Balance of existing loan, contract price of new property, and purchase costs. Repayments are generally capitalised to the loan (added to the loan)
- End Loan – Your expected ‘end-loan’ once your existing property is sold (including sale proceeds, etc). Repayments are generally Principal & Interest (more information on loan repayment types)
Why do people use bridging loans?
Whether it’s location or lifestyle, there are many reasons you might want to sell. But your timing may not necessarily coincide with the perfect property market conditions, so it’s important to know a few things about the market.
Bridge loans allow you to take your time in moving into your new place, whilst allowing you to retain your existing property for up-to 12 months.
Say the balance of the loan on your existing property is $600,000 and the funds required for the new property are $1,000,000. You may be able to borrow up to $1,600,000, which will be your Peak Debt.
Bridging Loan Example
You now have a bridge loan of $1,600,000, on which interest is payable, while you wait for the sale of your existing property.
If you’ve opted to capitalise the interest that accrues on the Peak Debt, the debt will continue to increase until you either start making repayments, or the sale of your existing property is completed.
To keep the numbers simple, let’s say in this example that you’ve been paying the interest and your Peak Debt remains at $1,600,000.
If the net proceeds of the sale of the existing property are $500,000 and you put that full amount towards the Peak Debt, then you will be left with an End Debt of $1,100,000 (that is $1,600,000 less $500,000).
An end loan is a normal standard mortgage product with regular repayments (more information on loan repayment types)
What to look out for with bridging loans
Does your lender allow you to capitalise interest? If your lender does not allow you to capitlise interest, you may be forced to make interest only repayments on the peak debt as well as principal and interest repayments on the end debt. This is not a traditional bridging loan.
Am I eligible for a bridge loan?
You may be eligible for a bridge loan if you;
- You must have equity in your home loan
- Most lenders insist that you have an end loan (there are a couple of lenders that will assist with no end loan though!)
- Where there is an expected end debt, generally, you cannot exceed 80% of the new properties value (you can go above this however, you may pay lender’s mortgage insurance!)
Get expert advice on your bridging loan! Book an Appointment with the bridging loan experts – Mortgage Choice!
What are the risks of bridging loans?
If you do not sell your existing house during the bridge loan period – generally 6-12 months, you may be in default of the credit contract. Another risk is that, if you don’t sell your existing property for what you expected, you may need to find other measures to repay the debt.
How much can you borrow on a bridging finance?
Generally up to 80% of the properties value. Anything above 80% may incur lenders mortgage insurance.
What does a bridging loan do?
A bridging loan is a special type of short term loan that covers the financial gap between the purchase of your new property and the sale of your current property. What’s great about a bridging loan is that it gives you the flexibility to buy a new property before you’ve sold your existing property.
