How Do Bridging Loans Work?

A bridging loan could be an ideal option for homebuyers who have found the house they want to buy but have not yet found a buyer for their previous property. Such loans can typically be organised quickly and can assist borrowers who need to rush to secure the acquisition of a new property.

Bridging loans are calculated on the owed amount on your current mortgage, adding the purchase price of your new house. This amount is referred to as “peak debt.” For instance, if you owe $300,000 on your current home loan and purchase a new property for $600,000, your peak debt would be $900,000.

Your lender will then deduct the possible sale price of your existing house from this amount, typically creating a buffer to consider the likelihood of selling at a lower cost to reach your current balance.

These are interest-only loans, implying you only owe for the interest charged on your current balance. Lending institutions will typically capitalise on this interest, making it payable upon the sale of your existing property. Then, the bridging loan will revert to a regular home loan.

There are two primary types of bridging loans: Open Bridge and Close Bridge.

Open Bridging Loan

It is taken out by property buyers who located their ideal house but have not found the buyer for their existing property. This bridging loan is one with no set period to sell your property.

Closed Bridging Loan

This loan is for borrowers who are in the middle of selling their house and have already exchanged agreements. They are easier to acquire than open bridging loans offered to borrowers who have not sold their current house yet. A closed bridging loan includes a predetermined time frame for your property to be sold, usually six months.

How Long Do Bridging Loans Last?

Bridging loans are generally provided for up to six months. However, in some cases, banks may extend up to 12 months. Most bridging loans purchase an established house, but selective lenders will approve bridging loans to construct a new property.

You must keep in mind a deposit of 20 per cent is needed for your new property, as bridging loans are not covered by Lenders Mortgage Insurance. Alternatively, you can leverage deposit bonds if you do not have funds readily available. It is a substitute for the cash deposit that assures the buyer will pay the total amount by the settlement date.

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