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Home Loan Variable: 5.94% (5.95%*) • Home Loan Fixed: 5.79% (6.39%*) • Fixed: 5.79% (6.39%*) • Variable: 5.94% (5.95%*) • Investment IO: 6.19% (6.85%*) • Investment PI: 5.99% (6.61%*)

Bridging Loans Explained: Understanding How Bridging Loans Work for Buying and Selling Property

Have you ever thought about buying a new house while selling your current one? It can be tricky without the right home loan. Bridging loans (sometimes known as relocation loans) are here to help with that. They work like a short-term support, letting you manage the gap between these big deals. This makes it easier to handle both buying and selling properties at the same time.

Bridging loan

Bridging loans help “bridge” your financial needs when you’re moving to a new home. They are key whether you’re upgrading your home or downsizing. Here’s how they help: they give you funds to buy your new house before the old one is sold. The alternative is to sell your current home first before purchasing a new home.

Ready to see how this could simplify your situation?

What is a Bridging Loan?

Are you thinking about moving house? A bridging loan might be something you find useful. It’s a short-term loan to help you purchase your next home before you’ve sold your old one. Many Australians turn to bridging loans to make this process smoother.

Definition of bridging loan

This special loan gives you the money you need for a new place while waiting to sell your old house. It’s key to making sure you can grab your dream home even if you haven’t sold your current one.

How bridging loans work

Bridging loans work pretty simply but they’re super helpful. They cover you financially when you want to move but your old place hasn’t been sold. These loans are set up for shorter times because the housing market moves fast. Using the equity in your current home, the lender can potentially lend you more than 100% of the purchase price for the new home. The lender then generally gives you 6 months to sell your old home.

They are usually structured as two loan accounts. One loan account is known as the “bridging loan” and this is paid off and closed once you sell your current property. The other loan account is known as the “end debt” and it remains in place after you sell your property.

If you are downsizing there may not be an “end debt”.

Benefits of bridging loans

There are lots of good things about using a bridging loan if you’re looking to purchase a new home. They let you:

  • Act quickly in a busy market, without your old home being sold first.
  • Not worry about finding temporary places to live or huge moving costs.
  • Feel secure that you can get your new home without waiting on old home sales.

Knowing these benefits can make a big difference when you’re in the middle of moving from one home to another.

Buying and Selling Property Using Bridging Finance

Are you stuck between buying a new home and selling the old one? Bridging finance could be your answer. It lets you handle both transactions without the stress of matching dates. You need to know about buying first, applying for a loan, and timing the sale of your old house perfectly.

Process of Buying Before Selling

Choosing bridging finance means you can move into your new home before selling your current home. This strategy waves off the usual financial pressures and problems of trying to simultaneously settle the sale of your old house and the purchase of the new house.

It kind of creates a ‘bridge’ with money. You use it to pay for the new place until you sell your current one.

Applying for a Bridging Loan

Getting a bridging loan involves a few steps. You need to gather the same documents as you would for a normal home loan such as:

  • Income documents
  • ID
  • Bank statements
  • Contracts of sale

Lenders will complete a valuation on your current property to ensure you have sufficient equity.

Timeframe to Sell Your Existing Property

With a bridging loan, lenders generally give you 6 months to sell. This can sometimes be extended to a year.

Bridging loan process

Phase Task Duration
Pre-Application Gather financial documents, complete valuations, assess borrowing power, sign real estate agency agreement to list current home for sale, choose lender 1-2 Weeks
Application Submit loan application, credit assessment completed by lender 1-2 Weeks
Post-Approval Sign mortgage documents, Finalising settlement of new property purchase 4-8 Weeks
Post-Settlement Marketing and selling the old property 1-6 Months

Understanding these buying and selling steps with bridging finance is critical. It lets you shift between homes with less financial worry.

Pros and Cons of Bridging Loans

Bridging loans help solve financial needs when shifting homes. We’ll look at their benefits and possible issues. Also, we’ll discuss how to manage loan repayments well during this time.

Advantages of Bridging Loans

The main advantages of bridging loans lie in their quick cash availability. Imagine you’ve found your dream house but still need to sell your current one. A bridging loan lets you move forward fast. This is key so you don’t miss out on buying due to sale timing differences.

Drawbacks of Bridging Loans

Yet, there are drawbacks of bridging loans to keep in mind. The bridging portion of the loan usually has higher interest rates than other loans. Some lenders don’t require you to make repayments on the bridging loan. Instead, the interest is added to the loan each month. This eases the pressure since you are only required to make repayments on the “end debt”.

Loan Repayment Considerations During the Bridging Period

When it comes to loan repayment during this time, careful planning is essential. Make sure you have a solid plan, like selling your old house, to clear this debt. It’s also smart to prepare for any delays in the sale. This way, you won’t get caught off guard financially.

Feature Advantage Drawback
Speed of Funding Fast access to funds Higher interest rates
Flexibility Buy new property immediately Financial risk if sale delays
Repayment Options Deferred payments possible (interest added to the loan each month instead instead of you making a repayment) Relies heavily on the sale of current property

It’s wise to consider these pros and cons when taking a bridging loan. And to plan well for repayments. This helps make choices that fit your financial needs during the transition.

Key Factors to Consider when Applying for a Bridging Loan

When moving from your current property to a new one, bridging loans help. It’s important to know about interest rates, deposit needs, and who can apply. This info helps you make smart choices for your bridging loan.

Interest Rates on Bridging Loans

Bridging loans often have higher interest rates than other loans. They’re designed for short-term use. It’s smart to check offers from different lenders to find a good rate for you.

Deposit and Equity Requirements

For a bridging loan, deposit and equity matter a lot. Lenders will see how much equity your current property has and your new property deposit. Being able to meet these needs decides the loan you get and how much you can borrow. Typically, a significant amount of equity is required in the current property to be sold.

Eligibility Criteria for Obtaining a Bridging Loan

Getting a bridging loan means meeting certain requirements. This includes credit checks and proving your income. Good preparation with the needed documents makes everything smoother.

Loan Terms and Maximum Borrowing Limits

It’s key to understand your loan terms and limit. These decide your repayment schedule and your financial planning in the transition. Being clear on this avoids any surprises and keeps you stable.

Frequently Asked Questions

Q: What is a bridging loan?

A: A bridging loan is a short-term loan used to bridge the gap between buying a new property and selling your existing one.

Q: How do bridging loans work?

A: Bridging loans work by providing you with the funds needed to purchase a new property before selling your current one. You can repay the loan once your existing property is sold.

Q: When is the right time to consider a bridging loan?

A: It’s a good idea to consider a bridging loan when you are looking to buy a new property but have not yet sold your current one.

Q: How is the value of your property taken into account for a bridging loan?

A: Lenders will assess the equity in your existing home when determining the amount you can borrow with a bridging loan. Some lenders will deduct up to 10% from the valuation as a “buffer” which then increases the “end debt” amount.

Q: What are the important factors to consider before taking out a bridging loan?

A: Before taking out a bridging loan, it’s important to consider your financial situation, the term of the loan, loan repayments during the bridging period, and any additional costs such as stamp duty.

Q: What happens if I am unable to sell my existing home within the bridging period?

A: If you are unable to sell your existing home within the bridging period, you may be able to negotiate an extension with your lender or explore other financial options.

Q: Are there any penalties for early repayment of a bridging loan?

A: Some bridging loans may have early repayment penalties, so it’s important to review the terms and conditions of the loan before committing.

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