In a competitive housing market, you might find your dream home but feel incapable of making an offer as you’re still tied up with selling your current property. It’s a common dilemma for many Australians, leading countless families to forgo a move they’ve always wanted.
Moreover, many investors find lucrative opportunities that will be snapped up fast but will also lose out due to their lack of available funds due to prior commitments.
Fortunately, by securing short-term bridging loans in Australia, you can gain the finance needed before selling any assets, ensuring you do not miss out on the home or investment you desire.
But what exactly is a bridging loan, and how can it help you?
What Exactly Is a Bridging Loan?
A bridging loan is a short-term financing option built to help you buy a new property before you’ve sold your existing one. Think of it as a financial bridge that enables you to cover the gap between selling your current asset (such as a home) and purchasing a new one.
How Does a Bridging Loan Work in Practice?
If you’ve found a new property, but your current home hasn’t sold yet, a bridging loan lets you borrow the money needed to buy the new location while still covering the mortgage on your existing home.
The logic behind this particular loan design is that once you sell your old home, you use the proceeds to pay off the loan.
The Process of Bridging Loans Explained
Here’s a step-by-step look at how it typically unfolds:
- Initial Loan Setup: The lender takes over your current mortgage and provides the funds needed for your new property. The total amount borrowed includes the mortgage balance on your old home, the cost of the latest property, and any related fees (like stamp duty).
- Interest Payments: You’ll typically make interest-only payments on the bridging loan. Often, this interest is added to the loan amount (capitalised), so you’re not paying out of pocket immediately.
- Selling Your Old Home: Once your old home sells, the money from the sale goes toward paying down the loan. What’s left is usually converted into a standard mortgage.
Why Consider a Bridging Finance in Australia?
A bridging loan in Australia offers a tailored solution to those in a unique situation, offering:
- Quick Action: In a fast-moving real estate market, waiting to sell your home could mean losing your dream property. A bridging loan allows you to act quickly.
- Avoid Renting: Instead of selling first and renting while you hunt for a new home, a bridging loan lets you buy first, saving the hassle of moving twice.
- Flexibility: This loan gives you breathing room to get the best price for your current home without time pressure.
The Two Types of Bridging Loans
There are two main types of bridging loans available:
- Closed Bridging Loan: This option is for those who already have a buyer for their current home. The loan term is fixed since you know exactly when the sale will go through.
- Open Bridging Loan: Have you not found a buyer yet? This loan gives you more time but is often a bit riskier since you’re unsure when your current property will sell.
What are the Bridging Finance Costs Involved?
While bridging loans offer clear benefits, they aren’t without costs.
Here’s what you need to consider:
- Higher Interest Rates: Bridging loans typically have higher interest rates than standard home loans.
- Dual Payments: You might need to cover both your old mortgage and the new loan until your current home sells.
- Market Risks: If the market slows and your home doesn’t sell quickly, you might sell for less than you hoped, affecting your financial plans.
An Example to Illustrate Bridging Finance in Australia
Let’s say you’ve got a $400,000 mortgage on your current home, and the new property costs $800,000. You could borrow up to $1.2 million to cover both the existing mortgage and the new purchase.
If your old home sells for $600,000, you’d use that money to reduce your loan to $600,000.
From there, it turns into a regular mortgage.
How to Apply for a Bridging Loan in Australia
A bridging loan can be a powerful tool for those needing to move quickly in the property market. While it is always best to discuss your specific situation with a professional, there are some common considerations you will have to make first when applying for a bridging loan in Australia:
- Eligibility: Lenders will look at the equity in your current home and your ability to make repayments.
- Terms: Loans typically range from 3 months to 2 years, depending on your situation.
- Amount: At Pacific 8, you can borrow from $300,000 to $25 million, with an LVR (Loan to Valuation Ratio) of up to 75%.
If you’re considering a bridging loan, contact our team at Pacific 8 to explore your options.
