What is 'Bridging Finance' and how does it work?
Purchasing a new home is very exciting but it can also be very challenging, particularly when you are selling and buying at the same time.
We know the feeling. After months of scouring the internet, attending open for inspections, bidding at auctions and negotiating with agents, you’ve finally found your dream home! It’s within budget, in a great location, everything that you need!
But what do you do if settlement on your new home is approaching, and you’re yet to sell or settle on your existing property? This is where a bridging loan can help!
Bridging loans can alleviate the stress of matching settlement dates and can help you move into your new home without having received the sale proceeds from your existing property.
But before you sign on the dotted line, you need to understand, What is bridging finance, and how is it calculated?
What is Bridging Finance?
Bridging Finance is a short term loan that can help you finance the purchase of your new property while you sell your existing property, acting as a ‘bridge’ to ensure both properties can be held at once.
A bridging loan is an interest only loan, in addition to your existing home loan which accrues interest and is closed once you settle and sell on your current property.
Generally, the banks will allow you up to 6 or 12 months to sell your existing property. However, the longer it takes you to sell your property, the more interest will accrue on the bridging loan. With current standard variable rates at 8% p.a., minimising the time between buying and selling properties can save you from needing extra funds.
How is Bridging Finance Calculated?
The bank will calculate the bridging loan by adding the value of your new home (incl stamp duty and fees) to the current debt owing on your existing property, this is referred to as your ‘Peak Debt’.
From this figure, they subtract the estimated sale proceeds from your existing home (bridging loan), to come up with your end debt. This loan is secured by the new property only and on-going repayments will be made based on this amount.
Let’s look at a basic example for John and Mary:
1. They purchased and settled a new house for $1,000,000 in January. The debt on their existing house (which they are going to sell) is $500,000.
Peak debt = $1,500,000
· They sell their existing house for $900,000 (less $50,000 costs) in March. Therefore, the net sale proceeds after fees is, $850,000.
Bridging debt = $850,000
· Settlement for the sold property occurs in July and with their net proceeds John and Mary pay down the peak debt by $850,000 leaving a loan of $650,000 on the new property.
End Debt = $650,000.
Although this process is generally consistent across all bridging loans, many banks have individualised polices and nuances. Therefore, it is important to come to us and get an approval up front, much like John and Mary!
This way you can ensure you never miss out on that dream home.