How Does Bridging Finance Work? Bridging Loans for House Purchase Australia [2022]

What is Bridging Finance?

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Transcript of - What is bridging finance?

What is bridging finance? Bridging finance is required when you want to buy another home to live in, but don’t have the money. The idea is that the bank will lend you the money in the form of bridging finance and once you’ve moved into your new home, you can then proceed to sell the existing property. Why bridging finance isn’t often recommended is that it’s something that is confusing to banks, mortgage brokers and real estate agents and therefore, the option doesn’t really get raised in consultation that often. 

Why can bridging finance be confusing?

The reason it’s confusing is very simple. Bridging finances aren’t done very much and because it is unfamiliar, it doesn’t get mentioned. Instead, the most common option is to first sell the existing property on a longer settlement period. This will then give you time to go and find a property to buy. Sometimes this is the best option. However, sometimes it’s not. The decision of what is best is generally made by the person making the decisions. Unfortunately, if the bridging option has been left out of the conversation, then the best option may not have ever got a look in. 

How does bridging loan finance work?

How does bridging loan finance work? Bridging finance varies a great deal from lender to lender, and many lenders don’t even do it. I’m going to try and give you a general overview, so you have a good understanding of how it works. The lender will hold both the existing property and the purchase property as security against the bridging finance. If there’s already a home loan on the current property, then that debt will be incorporated into the bridging finance as well. Bridging finance goes for up to 12 months, which means that from the time you purchase your property, you have up to 12 months to sell the existing property. I say up to 12 months because some lenders only give you six months. Bridging loans are interest only and generally added to the loan amount, which is great news as you don’t have to worry about paying a large home loan repayment for the period of the bridging. The bridging loan will also incorporate the cost of buying the property. The main one being stamp duty. 

How does the approval process work?

The first thing you need to know with any finance is that the bank needs to be happy. There are two main things to achieve this.

Number one, is there enough equity. This will depend on the amount of debt against your current property and the amount of debt during bridging and after you’ve sold your existing property. There’s no fast and loose rule here. However, you would generally want to have a 60% LVR or less on the existing property. LVR stands for loan to value ratio. To give you an idea if your current property is valued at 1 million, a bank would like to see a loan of 60% of this, therefore, the existing loan amount needs to be below 600 grand. Again, different banks have different rules, but that should give you a good idea.

The second one is, is there enough income? This will vary greatly from lender to lender, some lenders will want to see that you can borrow enough to cover the peak debt. The peak debt is basically the bridging amount plus the existing debt as well. So the peak debt is basically the bridging amount. That is the existing debt plus however much you need to buy the new property. The problem with the previously mentioned most common option of selling your property first on a longer settlement, then buying and marrying up the settlement dates is that the lender may not approve lending the money for the two loans. This is the same issue here when you’ve got lenders that assessing that borrowing on paid debt. The good news is is that there are lenders out there that will assess the bridging loan application based on the end debt. The even better news is that if there is no end debt, then there are lenders that will not require looking at income to verify so they can approve the loan. This is suitable for retirees that are looking to downsize.

3 Tips for Bridging Finance

Tips in bridging finance. Number one, know what you can realistically sell your house for. I come across so many people that are basically not realistic in what their house is worth. When you’re considering bridging, it’s important you’re realistic here, because the bank is going to be conservative anyway. If you don’t have realistic expectations, it’s going to be a hard process for you. You should be working with your real estate agent to figure out what similar properties have recently sold for and use that as a benchmark.

The second tip would be to consult with your mortgage broker before you decide to pull the pin. The best way to approach bridging finance is to deal with the good mortgage broker upfront and work with them. They’re the experts here and can see the risks or potential hurdles where you cannot if it was me wanting to do the bridging finance, I want to be pre-approved before I even thought of selling my property. A mortgage broker is going to be able to handle all of this for you.

Number three is consult with your real estate agent, if you can get into the purchase property that would allow you time to present your existing property in the best way so that you can sell it for the maximum price. 

The Wrap-Up!

At the end of the day, bridging finance is a tool to helpyou into your new home. There are different solutions that can do that, which is why you need a good mortgage broker. Like the team here at Will Bell Mortgage Broker on your side. If you need any help, please reach out. One more thing if you’re still watching. Please like and subscribe. I’d really appreciate it. Cheers.

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