If you've found a new home but have yet to sell your old property, an open bridging loan could be the solution.
Sometimes the process of selling an old property and buying a new one doesn't go as smoothly as it could. While it would be ideal to have your current home sold before settling on a new one, you may find you have to move quickly to secure your dream property. In circumstances like this, an open bridging loan can fill the gap.
What is a bridging loan?
A bridging loan covers the gap between the sale of properties. If you haven't settled the sale of your current property before settling on your new home, a bridging loan prevents you from having to pay two mortgages simultaneously.
Bridging loan lenders calculate what's known as your peak debt, which is the amount you owe on your current property plus the value of the property you're buying. Then they subtract the likely sale price of your current property to determine the size of bridging loan you'll need. Most lenders will only lend on 80% of the value of your peak debt. Here's an example of how it works:
- Amount owing on current home loan: $250,000
- Value of new property: $700,000
- Peak debt: $950,000
- 80% of peak debt: $760,000
- Likely sale price of old property: $600,000
- Ongoing balance: $160,000
During the bridging period, you'll be charged interest on the ongoing balance of the loan while you continue to pay your current home loan. Most lenders will capitalise this interest so you don't have to make regular repayments. Instead, when your home sells, your bridging loan will convert to a standard home loan for your new property and the interest you've accrued will be capitalised onto it.
Bridging loans come in two varieties: open and closed. Whether you need an open bridging loan or a closed bridging loan will depend on where you are in the process of selling your old home.
What is an open bridging loan?
An open bridging loan is one with no set time period in which to sell your property. While a closed bridging loan has a predetermined time frame in which your property must be sold, typically six months, an open bridging loan does not.
When would I use an open bridging loan?
You would use an open bridging loan if you have yet to exchange contracts on the sale of your current property, or if you expect settlement to be delayed.
How do I get an open bridging loan?
Open bridging loans are more difficult to be approved for than closed bridging loans, because they carry more risk for the lender. Before approving an open bridging loan, a lender will want thorough details on the property you're purchasing and your current property, along with ample evidence that your current property is being actively marketed.
Because open bridging loans are more difficult to obtain, you should consider speaking to a mortgage broker to help guide you through the process. You can fill out the form below to be contacted by an Aussie Home Loans expert. Or you can look at the table below the form to find a wider selection of bridging finance options.
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