What are the Benefits of a Bridging Loan?
Are you in a situation where you have found the house of your life, however you are not able to purchase or put a deposit for your dream house as you need to sell your current house first to have the money for the second house. But by the time you have sold and gotten the money for your existing house, your dream house would have been sold to another buyer.
Bridging loan can help you to put a deposit for you dream house while you wait for the money from the sales of your existing house to come in. Bridging loan is a short-term loan which is used to help when the settlement date of the houses does not match.
So how can you qualify for a bridging loan?
It is recommended for you to have at least 50% of home equity (monetary worth of the house after deducting the amount still owe) as it might not be worth it to take a bridging loan.
You must meet the standard service requirements for bridging loan. Similar to a standard refinance, you need to provide your current income, employment status, expenses and supporting documents to apply the loan.
The maximum bridging term for an existing property is 6 months and for a new property, it is 12 months. You are able to extend the bridging terms but your bridging loan need to be reviewed first before you are able to extend the loan.
You need to have a sales contract for your existing property before you are able to get a bridging loan. You need to have a contract that shows that you have sold the house away and is now waiting for the payment.
For bridging loans, you can borrow up to 80% of the peak debt which is the purchase price of your dream house and the remaining mortgage you have from your existing house added together. Normally, lender will also add a 6 months’ interest rate buffer to determine if you are able to pay back the loan amount.
Every loan has it advantage and disadvantage, below are some of the pros and cons for bridging loan which you should know.
• You do not need to wait to get a loan to buy a new property
• You are able to take your time to get the best price for your property as you do not need to rush the sale of your existing property for your new property
• You would only need to pay the interest of the loan when your house has not been sold, only upon selling your house, you would need to start paying back on the loan.
• The interest rate for bridging loan by bank is charged at a standard variation.
• The fees and charges for bridging loan is at the same rate as standard home loan.
• You are able to pay back unlimited amount of time to reduce the interest cost.
• Interest for the bridging loan is compounded at a monthly rate, this means that the longer it takes you to sell your existing house, the higher the amount of interest you had to pay back for the loan.
• It will cost you double the amount for valuation, as you need both your existing house and new purchase house valuation for the loan.
• If you did not sell off your existing property within the bridging period, you will have a higher interest for your loan and you would need to make repayment for your principal and interest.
• You are not able to redraw once you have chosen to my repayment for your bridging loan.
• You might be charge for early termination fees if you change lenders. If your lender from your existing home loan does not offer bridging loan, you would need to find another lender that provide this service, however, they would most likely insist you to have all your debts and loans to be taken from them, this means that you might need to pay termination fee for switching to another lender.