Bridging Loan in Sydney
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If you’re thinking of applying for a bridging loan in Melbourne, there are a few things you need to know. Bridging finance can be a great way to get your property purchase over the line, but it’s important to understand the basics before you apply. You won’t find a better loan than with brokers from Break Free Home and Car Loans who prioritize our clients’ needs. We work with a wide range of lenders, so we can find the perfect loan for you from a large selection of options. Talk to our experienced brokers to begin your loan application today.
What Is A Bridging Loan?
Bridging Loan in Brisbane
How It Works
How does a bridging loan work? Bridging loans work by giving you access to the funds you need to complete a property purchase before your long-term funding comes through. This can give you a significant advantage when it comes to securing the property you want.
As it can take some time to sell your home, you may not have the sales proceeds you need to buy your new property. With a bridge loan, you can avoid the stress of matching up settlement dates. You’ll have the flexibility to move quickly into your new home and give yourself the time to sell your existing property. You won’t have to vacate your premises or hold off moving. For this reason, short-term bridging loans are also sometimes known as relocation loans.
General Requirements
You can find a bridging home loan from a variety of Aussie lenders including bank term loans, accredited online lenders, and credit unions. You can also look into private lending and other bridging loan alternatives from financial companies. The general eligibility requirements to qualify for bridge loans are:
- Have equity in your property: To get the most value out of your loan, you should have more than 50% of the equity in your home.
- Meet standard lending requirements: For lenders to approve your loan, you must provide evidence of your current income, employment status, expenses, and other supporting documents. You need to have a good credit history to get low-interest rates, as lenders will view you as a lower-risk borrower.
- Maximum bridge term of 6 months for existing properties: If you’re applying for finance on an existing property, you need to pay off your loan within 6 months. Bridging extensions are only available on a case-by-case basis.
- Maximum bridge term of 12 months for a new property: If you’re buying a new property, you need to repay your loan in 12 months’ time.
- Unconditional sale on an existing property: You need to have already exchanged contracts for existing properties with the buyer or agent before you can be approved for a bridge loan.
How Much Can I Borrow?
The borrowing limit for bridging loans in Australian finance depends on your specific lender. But in general, you can borrow:
- Up to 80% of the peak debt: Peak debt is the purchase price of the new property plus your current mortgage.
- Up to 90% of the peak debt: Most banks and online lenders who offer bridging finance will offer up to 90% of the property value. However, loans with an LVR value as high as this are much harder to qualify for and Lenders Mortgage Insurance (LMI) will be payable.
- Bridging loan interest rate payment and fire sale buffer added: Oftentimes, lenders will add a 6-month interest rate buffer when evaluating your ability to repay their loan. They will also discount the projected sale price of your existing property by 15%. This is known as the fire sale buffer, which will affect your borrowing power.
Types Of Bridging Loans
Bridging finance can be a great option if you need to buy a property quickly. It can also be useful if you’re looking to buy a property at auction, or if you’re struggling to get traditional funding. The following are two main types of bridging loans you should know about:
Closed
This is where you and the lender agree on a settlement date for your current property and when you’ll be able to pay back the bridging loan’s principal. A closed bridge loan combines existing and new mortgages. This sort of bridging loan is only available to homeowners who have previously sold their current home. Because sales rarely fail after the exchange, lenders see them as less risky.
Open
This is for people who have found their ideal home but don’t know when they’ll sell their existing house since they haven’t done so yet. Lenders often dislike this kind of arrangement. In situations like these, lenders are more than likely to demand a number of further inquiries and require copies of the new property’s paperwork as well as evidence that your current home is being actively marketed. You’ll need a large amount of equity in your existing house and a plan for what to do if the transaction fails.
How To Apply For A Bridging Finance In Melbourne?
The process for applying for bridging finance in Melbourne is similar to applying for refinancing in other parts of Australia. A broker can help you speak to a lender about your options, and make sure you have the necessary documentation to support your application. These documents include:
- A completed bridging finance application form
- Loan purpose statement
- Most recent personal and/or business tax returns
- Personal and/or business financial statements
- Details of current asset and liability positions
- 6 months of personal and/or business bank account statements
Interest
The interest on your bridging loan is capitalised on the peak debt and is compounded monthly until the sale is complete, causing your peak debt to increase. You will only be able to capitalise on your repayments if you meet the total LVR (loan-to-value ratio) set by the lender, usually capped at 80% of peak debt. The longer it takes for you to sell, the higher up your interest goes.
LVR
Consider your financial position very closely. Compare the costs and decide if you’re better off using a bridging loan. If your peak debt is greater than 80% LVR then it may be too high so you should consider selling first and then buying afterward rather than using a bridging loan. In this case, you’d also be subject to a premium called the Lenders Insurance Mortgage (LMI).
Security
The biggest drawback in bridging finance is for borrowers to overestimate the sale price of their existing home and fall short of the amount needed to repay the bridging loan. Another major risk is being unable to sell your property within the bridging period. You may end up selling your home for less than you expected, which leaves you with a much higher loan balance than initially planned. In the worst case scenario, you could lose your home and still owe the bank money. It’s also why lenders prefer closed bridging loans as opposed to open bridging loans because they are less risky. If the sale falls through, the borrower will be in debt and the lender will seize their property.
Repayments
You should make repayments during the bridging period to decrease the interest and overall peak debt. You’ll also need to pay for two valuations.
Timing
To offset the risks of bridging finance, you need to determine how long it will take you to sell the property and give yourself a buffer period. Research recent sales of similar properties in your area. You may not be able to sell your home within a typical 6 month bridging period, but can go up to 12 months with select lenders and they may still provide you a good offer. Be realistic about how long it will take for you to sell and how much your property can be sold for. Additionally, take into account how long the settlement will take, which is 6-8 weeks in some territories.
Equity
You are recommended to have at least 50% in equity in your existing property to avoid paying a large interest bill. We advise you to get a proper valuation of your existing property and be realistic about how much you can sell it for.
What Are The Pros And Cons Of Bridging Loans?
| Pros | Cons |
|---|---|
| Buy your property straight away: No need to wait to get a loan. |
Interest is compounded monthly: While interest is capitalised on top of peak debt, the longer it takes to sell your property, the more interest will accrue on your loan. Interest is compounded on a monthly basis. |
| Gives you time to get a better price on your property: Avoid the stress of a rushed sale and sell your property for a higher price. | You need to pay for two valuations: You’ll pay for the valuation of both your existing and new property. This can cost upwards of $200. |
| Interest-only repayments capitalised at peak debt: Repayments are frozen during the bridging term until you sell your existing property. You only need to pay your current mortgage and don’t have to manage two home loans. |
Higher interest rate if you don’t sell your property on time: If you can’t sell your existing home within the bridging period, lenders will charge a higher interest rate. Many will also need you to begin making principal and interest repayments on peak debt in order to service both loans, causing financial stress. |
| Standard interest rates from banks: Banks used to charge higher interest rates but now there are lenders with standard variable interest rates. | No redraw facility: If you make repayments during the bridging term but need to redraw for some reason, you won’t be able to do so. |
| Similar fees and charges to standard home loans: Application fees apply, but you don’t need to worry about break costs or discharge fees. Keep in mind if you’re likely to sell the property in less than 3 months, lenders won’t generally approve a bridging loan. |
Normal early termination fees apply if you switch lenders: If your current lender doesn’t offer a bridging loan product, you’ll need to switch lenders who will likely insist on taking on your existing mortgage plus the bridging loan. Because they’ll be the ones to take on the entire debt, you will be liable to early termination fees and break costs with your old lender especially during fixed interest periods. |
| Make unlimited P&I repayments: You can reduce your interest bill and make as many principal and interest repayments on the bridging loan until you sell your property. | |
| Avoid the cost of renting and moving twice: Renting and having to pay for moving expenses twice may be better than getting a bridging loan, but sometimes it can be more expensive depending on the size and scale of your property. Take inventory of your current home. Speak to a qualified mortgage broker to find out which option is the better choice for your specific case. |
Using The Features Of Bridging Loans
Altering The Purchase Contract
Bridging finance can provide the opportunity to renegotiate the purchase contract with the vendor. This is extremely beneficial if the original terms of the contract are no longer favourable or if there has been a change in circumstances. Bridging finance can also be used as a way to buy a property at auction.
Negotiating A Longer Settlement
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Frequently Asked Questions
What Is A Bridging Loan?
Bridging finance is a type of short-term loan that can be used to ‘bridge the gap’ between the purchase of a new property and the sale of an existing one. It’s typically used by people who are looking to buy a property before their current one is sold, in order to avoid having to move twice.
Bridging loans can be a great option if you’re looking to purchase a property quickly, as they can be approved and funded quickly. However, it’s important to remember that bridging loans are typically more expensive than traditional home loans, so you’ll need to make sure you’re in a position to repay the loan before taking one out.
If you’re thinking of taking out a bridging loan, it’s important to speak to a mortgage broker who can help you compare the different options available and find the best deal for your needs.
How To Apply For A Short Term Bridging Loan In Melbourne?
The process of applying for bridging finance is typically quicker than applying for a standard home loan, and you can usually get an answer within 24 hours. However, it’s important to compare interest rates and fees before you apply, as these can vary significantly between lenders. These are some documents you’ll need to apply for bridging finance:
- A copy of your contract of sale for the new property
- A copy of your existing mortgage statement
- Proof of income (e.g. payslips or tax returns)
- Proof of identity (e.g. driver’s licence or passport)
How Does A Bridging Loan Work?
Bridging loans are typically interest-only, so they can be more affordable than traditional home loans. They can also be used for renovations or other short-term projects. If you’re thinking about applying for bridging finance, here are some of the benefits to consider:
- Quick and easy approval: Bridging finance can be approved quickly, often within 24 hours. This can be helpful if you need to move fast on a property purchase.
- Flexible repayment options: You can typically choose how you want to repay your bridging loan, whether that’s through regular interest-only payments or by making a lump sum payment at the end of the loan term.
- Competitive interest rates: Bridging loans typically have lower interest rates than traditional home loans, making them more affordable.
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