Many people table the idea of using bridging finance but few really understand how its operates or what it effectively achieves. At its simplest it enables a home buyer to purchase a new property before the sale of their existing home. More often than not it is owner occupiers rather than investors who will use this product.
The finance structure basically enables you to borrow up to the full purchase price of the new property plus all stamp duties and closing costs like stamp duity, legals. Generally the lender will give you between six and twelve months to sell your current property and release its equity to enable the current loan to be closed out and use any surplus money left over to reduce the bridging loan on the new property plus any interest fees and charges. Generally the interest on the bridging loan is capitalising (interest is added to the loan). Your responsibility is to only meet the repayments on the existing loan during the bridging time frame. A few important things to consider;
- You generally need a fairly good amount of equity in your current property to consider the use of bridging finance especially if you new purchase property is likely to be more expensive than your selling property
- Some lenders require servicing evidence (afforrdability testing) on the end debt position after your current home is sold but other lenders require your servicing evidence to be on the peak debt amount which makes it difficult to secure support with such lenders
- Interest rates on bridging finance are generally not discounted and are higher for the term you might have bridging for
- The bridging finance interest calculation only starts when the target purchase property settles so if you can negotiate a long enough settlement you might be able to secure a quick sale on your current property which maye minimise or completely eliminate the time frame you need to be exposed to a bridging loan structure
As you can see there are quite a few variables to bridging finance and not all lenders and policies are created the same so get in contact with us here.