BRIDGING HOME LOAN

Have you found your dream property but have yet to sell your existing home?

A solution is to consider a bridging loan, which is a short-term loan that provides financing to buy a new property before, or while you sell your existing home. A bridging loan generally allows you to have 6 - 12 months to sell your existing home.

If you’re considering building a new home, a bridging loan can also work. You will generally have 12 months on the loan while your new home is being built.

Let’s have a look at an example of how a bridging loan works in practice.

John has an existing home with a loan balance of $300,000 and he is looking to buy a new home priced at $800,000. His total short-term ‘peak debt’ would be $1,100,000, on which interest is payable.

After a few months, John sells his existing home for $500,000 and he puts the sale proceeds towards his bridging loan. This means his ‘end debt’ will be reduced to $600,000, which becomes the new loan amount. At this point, John’s mortgage reverts to a standard home loan with regular repayments.

Pros

• Reduces the financial burden of paying two loans at the same time.
• You can borrow up to 100% of the new property purchase price.

Cons

• May be more expensive than a standard home loan, as you’ll have more interest to pay on a larger loan.

Assessing your bridging Loan

1. How much equity do you have in your existing home?
   The principle is that the more equity you have, the more you’ll be able to borrow.
2. Do you have an end debt?
   Most lenders will lend on the basis that there will be an end debt, but this may not apply to people who are downsizing. In this case, there may be fees in place to compensate for not having end debt.
3. What is your maximum end debt?
   If your end debt is more than 80% of the new property purchase price, then you may be required to pay Lender’s Mortgage Insurance.