Bridging loans exposed
What a bridging loan does is essentially gives you the finance to buy a new property without your old home being sold, yet. This gives you confidence to know where you are going to move to when you put your home on the market.
Bridging loans of the past were known to be scary beasts with excessive interest rates. Bridging today provides competitive interest rates and features in a facility that makes buying and selling a lot easier.
Most bridging loans will allow you to make minimal repayments on the loan while you’re selling (although I am going to tell you it’s clever to continue to pay as much as you can) because interest is allowed to add to the loan for a particular time frame – usually 6-12m.
The actual loan itself is assessed on the basis of whether or not you are likely to be able to afford the ongoing repayments of the “end loan” the loan you will have once your current home is sold, so you don’t have to qualify for the whole debt with two homes.
Now I have used the term “end loan”, this is something banks calculate in bridging and it’s more than you think you’re going to owe – because the bank will work on a worse case basis.
Basically their calculation of end debt comes from:
· Their conservative valuation of your current home
· Less a 10% margin in case you have to sell quickly
· Less 6 - 12 months worth of interest to be added to the loan
· equals a higher end loan amount than you anticipate
And because of this it can be difficult to qualify unless you have a lot of equity in your current home, (but let us have a look at the numbers for you anyway). And remember that contributing to the interest bill, selling quickly, and getting the full price all obviously reduce the end loan that you will actually have ongoing.
The other strategies to note (to take pressure off) are offering extended settlement to the sellers of the place you’re buying – if they don’t know where they are moving to this is very attractive to them.
Western Weekender article https://issuu.com/weekenderpenrith/docs/property9sep/26