A guide to bridging loans and how they work
Last updated on June 16th, 2023
A Guide to Bridging Loans and How They Work in Australia
In the dynamic world of real estate, bridging loans have emerged as a practical solution to bridge the financial gap between buying a new property and selling an existing one. Whether you're an aspiring homeowner or an astute property investor in Australia, understanding bridging loans and how they work can provide you with a competitive edge in navigating the property market. This article aims to demystify bridging loans and shed light on how they work in the Australian context.
What are Bridging Loans?
A bridging loan, also known as bridge finance or a bridging facility, is a short-term financing option designed to bridge the financial gap when buying a new property before selling an existing one. It essentially provides interim funding until the proceeds from the sale of the current property become available.
How do Bridging Loans Work?
- Dual Ownership: When acquiring a new property while still owning the existing one, bridging loans facilitate dual ownership during the transition period. This allows you to avoid the inconvenience of having to move multiple times.
- Accessing Equity: Bridging loans enable borrowers to access the equity tied up in their current property to fund the purchase of the new property. The loan amount is typically based on the combined value of both properties.
- Repayment Options: Bridging loans usually have flexible repayment options. Interest-only repayments are common during the bridging period, with the principal paid off once the existing property is sold.
- Timing Considerations: Bridging loans are intended for short-term use, usually ranging from a few months to a year. It is crucial to have a clear understanding of the expected timeline for selling the existing property to ensure the loan term aligns with your plans.
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Types of Bridging Loans
- Closed Bridging Loan: This type of bridging loan has a fixed repayment date, which is typically set when the sale of the existing property is expected to be finalized. Closed bridging loans often offer lower interest rates due to the certainty of repayment.
- Open Bridging Loan: An open bridging loan does not have a fixed repayment date but usually comes with a higher interest rate. It is ideal for borrowers who are uncertain about the sale of their existing property or anticipate a longer timeframe for the transaction to be completed.
Factors to Consider
- Loan Amount: Bridging loans usually cover up to 80% of the combined value of both properties. It's important to assess your financial capacity and the potential sale price of your current property to determine if the loan amount meets your requirements.
- Interest Rates and Fees: Compare the interest rates, fees, and charges offered by different lenders to ensure you secure the most favorable terms. Consult with a mortgage broker or financial advisor to evaluate the overall cost of the loan and find a suitable option.
- Exit Strategy: A well-defined exit strategy is crucial when taking out a bridging loan. Consider factors such as the current state of the property market, demand for your existing property, and engage in realistic pricing to ensure a smooth sale.
- Lender Requirements: Each lender has specific criteria for approving bridging loans. Lenders typically evaluate your ability to service both loans simultaneously and assess your financial stability. Meeting these requirements is vital for loan approval.
Bridging loans provide a flexible financing option for Australians navigating the property market during the transition between selling an existing property and acquiring a new one. By understanding how bridging loans work and considering essential factors, such as loan amounts, interest rates, and repayment plans, borrowers can make informed decisions. Remember to consult with professionals, such as mortgage brokers or financial advisors, to ensure you select the most suitable bridging loan for your circumstances.
Speak with a Mortgage broker today! about bridging loans and how they work.
