Bridging Home Loans
Last updated on March 3rd, 2022
Bridging home loans are temporary loans that let you borrow money until you get finances for a longer-term loan. This is an excellent way of financing your new home while you wait for your current home to get sold.
How Do You Compute Bridging Loan Value?
To understand bridging home loans, you first have to understand your peak debt. Getting your peak debt value is simple. Take the value you owe for your mortgage and add that to the price of the new property.
The value that you get factors into the bridging loan. How so? The possible sale price of your current home will be subtracted from your peak debt value. The resulting number, more or less after applying buffers, will be the value of your bridging loan.
Take note that bridging loans are interest-only — you only pay interest for a specified amount of time. Bridging loans usually become normal home loans when your current home is sold.
What are the Types of Bridging Home Loans?
There are two types of bridging loans that you have to know about. These are open bridge loans and closed bridge loans.
- Open bridge loans
Do you have a property that you want to buy, but your current home still has no buyer? If so, then an open bridge loan is for you. With these loans, no predetermined time dictates when your current home needs to be sold.
From a bridging loan lender’s perspective, these are much riskier since you won’t have a potential customer. As such, the lender will need evidence that you’re doing what you can to market your home. You’ll also need proof of equity in your property because of the risks involved for the lender.
- Closed bridge loans
If you have a clear exit plan from the loan, a closed bridge loan is for you. These are for those who have already done the contract exchange process when selling a home.
Since there’s already a clear plan of selling, this poses fewer risks to bridging loan lenders. As such, they’re much easier to get approved.
Unlike open bridge loans, closed bridge loans involve a predetermined date when the property is to be sold. This also dictates when the loan is to be repaid.
What are the Advantages and Disadvantages of Bridging Home Loans?
Like any other loan, bridging loans also come with their pros and cons. Some of the advantages you get from a bridging loan include:
- Timing: With a bridging home loan, you get to control the timing of the sale. Since it’s a temporary loan, you can wait for a longer-term loan as you purchase. This means you can snatch up property that you like at any time.
- Lesser financial burden: You only need to make repayments for the interest. Full repayments shouldn’t be a worry until you can finally finance the regular home loan.
- Immediate funds available: Since you don’t have to wait for your property to be sold, you have funds immediately available.
Meanwhile, the disadvantages of a bridging loan are:
- Higher interest rates: Many bridging loan lenders typically lend at a higher interest rate as a result of delayed cash flow.
- Longer interest-only payments: You make repayments only for interest while doing the bridging loan. This means that the longer it takes for this loan to become a regular home loan, the longer you pay interest. This can be a problem if your property takes longer to get sold.
Compare Bridging Home Loans from Different Lenders
There are many bridging loan lenders available in the country, and it’s wise to compare them carefully before you commit.
Using a comparison site is a good move since you get a clearer view of what you’re getting into – from multiple possible loans. At Makes Cents, you’ll be able to compare bridging loans to help you find one that suits you. Check out our comparison tool today!
