Bridging Loans and Bridging Finance for Property – Understanding what they mean
So what is a Bridging Loan ?
Whether you call it a bridging loan or bridging finance, it essentially means the same thing. The term refers to a short term loan meant to finance or refinance a purchase of an asset. In this context we are talking about the asset being a property. Bridging generally means an interim loan required to span a gap in time between the existing loan and its replacement loan attached to a new property.
There are many circumstances that may require this type of funding. A common reason may be where a sale of a property is pending but not settled and the purchase of a new property is being secured but you lack the capital to complete the purchase. The bridging finance allows you to settle on the purchase while your sale progresses to completion.
Another is a property developer who is over budget to complete a project and the normal bank funding channel is not open to complete the development so they will look to bridge the funding gap with short term finance. Historically the interest rate of a bridging loan or bridging finance is substantially higher than a normal home mortgage. When the duration or time period required to carry this loan is short , the additional costs may not be that significant. however, over longer periods of time , the costs can be significant. Where a bridging loan and finance is often be provided by a bank is where a bank customer is building a new home and it is running behind over budget but the owner is yet to finalize the sale of their home.
Bridging Loan Interest rates
Interest rates for bridging finance are usually higher than normal home mortgage rates due the the higher risk to the lender and the shorter term involved. With interest rates very low at the moment even bridging loan rates are affordable. That has not always been the case. Bridging loan rates have dropped along with most mortgage related loans and are available from most of the major banks and lenders.
Securing this type of finance from the alternative lenders like solicitors, will normally add another 3 % – 5 % or so to the interest rate charged.
To assist with your calculations , Home Valuation Guide have a Loan Calculator panel on the website that will allow you to check what the different interest rates will mean in terms of calculating your loan repayments, click here: http://HOMEVALUATIONGUIDE.NET.AU/refinance-calculator-for-mortgage-and-home-loan/
Should i Use a Finance Broker for a Bridging Finance
Basic home mortgage lending is the bread and butter for the banking system. It does not require a great deal of skill from their lending officers. It is really more about filling in the blank spots on the loan application and see if you are approved. Bridging Finance on the other hand has a lot more variables and income considerations to take into account. This can add a degree of complexity to the loan application and and make for a more detailed and comprehensive application. Using a specialist finance broker who knows how to collate and present the information on a bridging finance application is money well spent. Often many bridging loan applications do not get past the initial perusal stage as the borrower has not got all the required information together and the numbers just don’t stack up. An experience broker will work with you to get the required detail together to give the loan application a much greater chance of being approved.
At Home Valuation Guide, we can assist in the early stage of the process for bridging loans by providing a comprehensive valuation guide for your property :http://homevaluationguide.net.au/
How does a bridging loan work ?
Usually upon taking out a bridging loan, your lender takes over the mortgage on your current property and the mortgage regarding the purchase of your new property. The entire amount of money borrowed is usually secured by these properties. It usually includes the loan balance on your current home, lenders fees, legal fees, stamp duty and the new home’s contract purchase price. Generally, the repayment method on this kind of loan is calculated on an interest-only basis. In many cases the interest on the loan may be capitalized until such a time as the current home is sold and the short term debt is repaid. In this example , you are bridging the funding gap between an existing property and a property newly purchased. There are many other scenarios where a bridging loan works very well, but this is the most common.
Here is an example of a bridging loan scenario
If the purchase cost of your new property is $500,000 and the balance-of the loan of your existing property is $400,000, but it is worth $600,000 you could usually borrow up to around $850,000. This will be your peak debt. In this case you would have a $850,000 short term bridging loan, while the sale of your existing property is completed. Interest will not be paid on the original $400,000 loan; instead it will be paid on $850,000. If the net proceeds generated from the sale of the existing property are $600,000, as a borrower, you will be left with a loan balance of $250,000 and any additional capitalized interest.
Capitalizing repayments on a bridging facility
Some lending institutions do permit borrowers to capitalize interest on a Bridging Loan, relieving the borrower of the need to make regular loan repayments in the course of the bridging period. The loan balance will therefore be increased on a daily basis as interest is accrued on the loan. The borrower’s monthly interest costs will be slightly higher due to the interest accruing on a daily rather than monthly basis. For many borrowers this is a fair trade off as the cash flow is often strained during this period. Making some repayments during this period however is recommended to prevent a ballooning of the total amount of the loan due at completion and also to limit the amount of extra interest being charged.
If a Bridging Loan is needed, your current lending institution is usually in the best position to help. However if the existing lending institution doesn’t offer a Bridging Loan, there are a large number of banks and building societies who will. The issue of which lender holds what level of security is what complicates this situation. Your new lender may take on the current loan, and actually pay out the existing loan rather than be in a subordinate position.
Risks to this type of short term loan
In as much as this is a good way to provide short term funding, bridging finance is not without its risks. Interest rates on refinanced bridged mortgages are higher. Interest will also be accumulating during the time it takes to sell your current property. You should therefore carefully consider the affordability of this. You should also be very careful not to overestimate your current property’s selling price. Quite a lot of home owners tend to do this. Ensure you get your home valuation report before arranging a loan.
Using Finance Broker Services
Home Valuation guide provides property reports to assist with valuations that can prove helpful bridging finance . The website also can direct enquirers to finance brokers around Australia so help assist you with any enquiries for bridging loans or bridging finance in Adelaide, Brisbane, Canberra, Darwin, Geelong, Gold Coast, Newcastle, Hobart, Melbourne, Newcastle, Perth, Sydney or Townsville.