Closed Bridging Loans
If you're buying a new property and the sale of your old home is underway, a closed bridging loan can provide temporary finance to cover the gap.
Lining up your finances when buying a new home and selling your old one can be tricky. A bridging loan "bridges" the time between the sale of your old home and the purchase of your new one. This makes it easier to buy a new property while you're waiting for settlement on the sale of your current property.
There are two types of bridging loan: closed and open. Closed bridging loans are for borrowers who are in the process of selling their home and have already exchanged contracts. They're easier to get than open bridging loans, which are offered to borrowers who haven't actually sold their current property yet.
How can a closed bridging loan help me?
A closed bridging loan is useful if:
- You've exchanged contracts on the sale of your current house and your settlement date is already fixed.
- You need temporary finance to purchase a new property (and you've found the property you wish to buy).
A bridging loan is a temporary finance solution while you wait for the funds from your sale to come through.
How does it work?
Let's say your current home (the one you're in the process of selling) isn't fully paid off when you go to buy a new home.
- The estimated sale price of your current home is $600,000.
- You've paid off half the mortgage, so you still owe $300,000.
- The new property you're buying costs $750,000.
Your lender will calculate your "peak debt" at $1,050,000. This is the cost of your new property plus the money you still owe on the old one. But lenders will only give you finance on 80% of your peak debt.
- 80% of your peak debt is $840,000.
Last, the lender subtracts the estimated sale price of your current home to calculate your ongoing balance. In other words, the amount they will lend you.
- Ongoing balance: $240,000
You will also need a 20% deposit, which the lender will calculate from your peak debt. So in order to get a bridging loan in the above scenario you'd need a $210,000 deposit. If you don't have this money available you could consider using a deposit bond to cover some of it.
Bridging loans come with a maximum loan term, between 6 and 12 months, with the expectation that you complete the sale within that time.
How do I repay a closed bridging loan?
Bridging loans are interest only products, meaning you only have to repay the interest charged on the amount you borrow (the ongoing balance). You can also capitalise your repayments into a single sum and pay it when your funding finally comes through from the sale of your property.
This is helpful because you will still have to pay off the mortgage on your current home until you actually sell it. By capitalising the repayments, you don't need to repay your interest costs until after the sale. So you're not stuck paying off two mortgages at once.
After the sale, your bridging loan converts to a normal home loan.
How do I get a closed bridging loan?
To get a closed bridging loan you usually need at least a 20% deposit. You also need to provide all the information about the property you are buying and the property you are selling.
These loans typically have application and monthly fees that can also add to your costs, so be sure to factor them in.
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