What are bridging loans and how do they work?
Bridging loans, as the name suggests, is a loan which bridges the gap between two home loans. If you currently already own a home and have a home loan, but are looking to sell and buy another home with a loan, then a bridging loan comes into play between the two properties.
Bridging home loans are a good way to buy a new property before the sale of your existing home, and are very common now due to the lack of housing stock and the fear of missing out on a dream home. Many people want to purchase a new home, before they have sold their current one to ensure they have a property to move into.
Bridging loans are most commonly used to finance the purchase of a new property while your current property is being sold, but can also provide finance to build a new home while you live in your current home.
The lender you choose takes security over both properties and lends against these properties until the sale and purchase process on both is completed. During a bridging loan period, your home loan will generally be charged as an interest-only loan.
While in the past these have been fairly straight forward, things have changed slightly with the LVR and investor rules which have been put into place.
There are two types of bridging loans, a closed-bridge and an open-bridge. A closed-bridge is where the settlement date for your current home and newly purchased home are both in place. Both dates are set in stone, so for the bank this is very low risk as they know how long the loan will be in place for.
An open-bridge is where you have the settlement date of your newly purchased home, and have the intent to sell your current home, but have no settlement date. Obviously this is a much higher risk to the bank, as there is always the risk that the current home may not sell or may sell for less than expected if the market changes.
In the past, houses could have been rented out to cover this loan, however with the new rules in place, doing so could mean the bank breaches its LVR restrictions, which would come with heavy penalties. Not being truthful to your bank about your intentions could also land you in hot water too, so this one can be a bit trickier to navigate.
Before taking out bridging finance, it’s a good idea to know what the lowest amount you could sell your current house for, and ensure that you won’t be too stretched financially, should you end up with two homes for a while. Extended settlement dates are also an idea, giving you a longer time to sell your current property.
If you are looking for bridging finance, we highly recommend you come and chat to us. We have a huge range of lenders to choose from, each with their own criteria and rates and we can place you with the one that suits you best. Most bank lenders don’t like to go above 80% LVR on properties, and while most people need to borrow 100% on their new property, this means you will likely need at least 40% equity in your current home, however we have a range of non-bank lenders that don’t need to abide by these LVR rules.
We can assist you with getting pre-approved for bridging finance, and ensure that there is enough leeway should the unexpected happen.
If you are wanting to buy or build your dream home, and are wanting to purchase before you sell, give us a call on 03 441 1307 and we can assist.