If you choose to purchase a new property prior to selling your current home, bridging loans can help cover you for the time you have both home loans. A bridging loan can give you the financial freedom to settle on a new purchase when your sale is not yet completed.
Loan Types and Time
Like normal loans, bridging loans offer either fixed or variable rates, and an interest-only repayment feature. The main differences tend to be the length of the loan, usually being between six and 12 months, and the interest rate.
Typically to calculate the loan amount, lenders will add the value of the new property to your existing mortgage and deduct the probable sale price of your existing property. Lenders will then assess whether you’re able to make repayments on this ongoing balance depending on current financials.
There are two types of bridging loans:
- Closed bridging loan:a date for sale of the property is agreed, and when it is settled the principal of the bridging loan will be paid. This is only available to those who have sold the existing property, but are yet to settle.
- Open bridging loan:this is for people who do not have a sale date for their existing property, and therefore there is no end-date. This is considered much riskier for lenders. That means more detail will be required by the lender.
Generally, interest rates for bridging loans are slightly higher than normal rates since there is a slightly higher risk to the lender. It is also because the timing of the loan is short term. The interest rate will depend on your specific situation factoring in all risks.
Tips to consider when considering a Bridging Loan
Here are some tips to consider when deciding whether to take out a bridging loan:
- Don’t overestimate the sale price of your existing property. This means you may fall short when it comes to paying back the bridging loan.
- Try to have at least 50 per cent equity in your existing property. This way you will avoid having a pay a large interest bill.
- Be realistic with the time it will take to sell your property and add settlement time.
- Remember to budget for all other expenses including inspections, stamp duty, valuations, repairs, and bank and legal fees.
- Always shop around and do your research.